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FEDERAL RESERVE’S SECOND MONETARY POLICY 

REPORT FOR 2012 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 

JULY 17, 2012 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

MARC LABONTE, Detailed CRS Economist 

ANDREW OLMEM, Republican Chief Counsel 

MICHAEL PIWOWAR, Republican Chief Economist 

DANA WADE, Republican Professional Staff Member 

GREGG RICHARDS, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

RYKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, JULY 17, 2012 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby 

Prepared statement ................................................................................... 42 

Senator Crapo ................................................................................................... 2 

WITNESS 

Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 4 

Prepared statement .......................................................................................... 43 

Responses to written questions of: 

Chairman Johnson .................................................................................... 46 

Senator Reed .............................................................................................. 51 

Senator Warner ......................................................................................... 52 

Senator Merkley ........................................................................................ 55 

Senator Vitter ............................................................................................ 59 

Senator Toomey ......................................................................................... 61 

Senator Kirk .............................................................................................. 64 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Monetary Policy Report to the Congress dated July 17, 2012 ............................. 68 

(III)

(1) 

FEDERAL RESERVE’S SECOND MONETARY 

POLICY REPORT FOR 2012 

TUESDAY, JULY 17, 2012 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:03 a.m., in room SD–G50, Dirksen 

Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call the hearing to order. Today we welcome Chairman Bernanke back to the Committee to deliver the 

Federal Reserve’s semiannual Monetary Policy Report. 

The legacy of the financial crisis still weighs heavily on our Nation’s economy and financial system today. Following the longest 

and deepest recession since the Great Depression, the economy has 

grown slowly but steadily since 2009. We have come a long way, 

but there is still a lot of work left to be done to get our economy 

back to the point where jobs are readily available and wages are 

rising for American workers. 

While the economy is not growing as fast as we would like, it is 

important to recognize that it would not be growing at all if Congress and the Federal Reserve had not taken action to restore financial stability. 

The Wall Street Reform Act created a framework for a financial 

system that is stable, works in the consumers’ interest, and never 

again allows bank bailouts. Recent events such as CFTC ordering 

Barclays to pay a $200 million penalty for LIBOR manipulation are 

reminders that we need tough, fair rules in place and strong, adequately funded financial regulators to enforce those rules. 

Some critics say that the cost of financial regulation is too high, 

but those same critics seek to underfund our regulators and ignore 

the reality that today’s high unemployment and battered economy 

were caused by inadequate and ineffective regulations. That is why 

we passed the Wall Street Reform Act, and that is why we are 

safer today than before the crisis. 

Any cost that Wall Street bears from playing by the rules pales 

in comparison to the trillions of dollars that Americans lost as a 

result of the last financial crisis. As we recognize the second anniversary of the Wall Street Reform Act, I look forward to hearing 

from Chairman Bernanke on the Fed’s progress in carrying out its 

new responsibilities and how these efforts have further stabilized 

the financial system. 

2 

Though policy makers can make the financial system more stable 

and resilient to negative shocks to the economy, they cannot prevent those shocks from occurring in the first place. While recent 

policy actions taken in Europe are welcome, the eurozone economy 

remains fragile. I would like to hear the Chairman’s thoughts on 

the progress that has been made in the eurozone and how U.S. policy makers can protect our economy from the potential fallout if the 

situation were to worsen. 

While the Fed’s role in the economy is important, we need to acknowledge that the Fed cannot solve all of the economy’s problems. 

The housing market has been holding back the economy for too 

long, and I ask this Committee to support efforts of my colleagues 

to enact legislation to give responsible homeowners the opportunity 

to refinance their mortgages. This legislation is fair because it 

helps homeowners who have been playing by the rules, is marketfriendly because it eliminates barriers to competition and is a costeffective way to jump-start the economy because it keeps more of 

workers’ paychecks in their pockets. 

Congress also needs to reach a sensible resolution to the fiscal 

cliff problem at the end of the year. I support the President’s plan 

to extend expiring tax cuts for the middle class. Today’s hearing 

underlines the importance of effective oversight, which has been a 

leading priority of mine as Chairman of the Committee. In the past 

18 months, we have conducted frequent oversight hearings with all 

of the financial regulators. In the coming weeks, we will conduct 

oversight hearings with Secretary Geithner, in his role as the head 

of the Financial Stability Oversight Council, and with the Director 

of the Consumer Financial Protection Bureau, Richard Cordray. 

I have welcomed the steps that Chairman Bernanke has taken 

to make the Fed more transparent, including the decision to release its communications with Barclays on LIBOR. I also believe 

that the Wall Street Reform Act’s enhancements to Fed transparency and oversight have had a positive impact. 

I now turn to Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Chairman Johnson. I appreciate your holding this hearing today. And, Chairman 

Bernanke, we appreciate having you with us for your semiannual 

Monetary Policy Report to Congress. 

Senator Shelby is unable to attend today because of a family obligation, but I ask that his statement be made a part of the record 

and note that he will be submitting questions for the record. 

Chairman JOHNSON. Without objection. 

Senator CRAPO. Thank you, Mr. Chairman. 

The U.S. economy continues to experience disappointing job 

growth and faces significant challenges with the eurozone debt crisis, the tax cliff, and our broader fiscal crisis, which includes the 

need to address the impending insolvency of the entitlement programs. A disappointing 80,000 jobs were added in June, holding 

unemployment steady at 8.2 percent. 

In June, Chairman Bernanke warned Congress about what could 

happen if it does not address the so-called fiscal cliff, noting that 

this would have a very significant impact on the near-term recovVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
3 

ery. According to CBO, if all of the tax and spending measures 

under current law were to occur together, the economy would grow 

at just 0.5 percent in 2013 compared to a 4.4 percent expectation 

absent these measures. 

Recently, one of the largest private owners of U.S. debt said that 

we have until 2016 to contain our borrowing before bond investors 

revolt and drive up interest rates. Others suggest the timetable 

could be much sooner. 

The lack of economic growth has caused some to call for further 

expansion of the Federal Reserve’s $2.9 trillion balance sheet 

through a third round of so-called quantitative easing. However, 

there are a lot of questions about how effective the first two rounds 

of quantitative easing have been, what their long-term impacts will 

be, and how effective an additional round of quantitative easing 

could be. I am interested in learning what more can be done with 

Government bond yields that have been so low for so long. 

Following the June FOMC meeting, the Federal Reserve announced it would continue its maturity extension program, the Operation Twist, through the end of the year. I am interested in 

learning what have been the results so far and what are the expectations going forward. 

Another drag on the economy are the hundreds of Dodd-Frank 

proposed rules that will increase the cost of capital formation in 

the long run and in the short term add to the climate of uncertainty and complexity. The concern that I hear most is that the 

regulators do not understand the cumulative effect of the hundreds 

of proposed rules and that there is a lack of coordination between 

our domestic and international regulators. That is why it is so important that the regulators perform meaningful cost/benefit analysis so that we can understand how these rules will affect the economy as a whole, interact with one another, and impact our global 

competitiveness. 

Ultimately, we need to have rules that are strong enough to protect our economy but that can adapt to changing market conditions 

to promote credit availability and spur job growth for millions of 

Americans. 

Also, like many of my colleagues, I am learning about the issues 

related to the setting of the London Interbank Offered Rate, or 

LIBOR, which serves as a benchmark for trillions of dollars of 

loans and derivatives, including the cost of many mortgages in the 

United States. Recently, Barclays agreed to pay a $450 million fine 

to settle manipulation charges brought by the U.S. Department of 

Justice, the Commodity Futures Trading Commission, and the 

United Kingdom’s Financial Service Authority. 

Investigations that banks manipulated the LIBOR process are 

continuing, and questions are being asked whether international 

and domestic regulators, including the Federal Reserve, took sufficient action. I look forward to hearing from Chairman Bernanke on 

all of these issues, and, again, Mr. Chairman, I welcome you here 

for your report today. 

Chairman JOHNSON. Thank you, Senator Crapo. 

To preserve time for questions, opening statements will be limited to the Chair and Senator Crapo. However, I would like to reVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
4 

mind my colleagues that the record will be open for the next 7 days 

for additional statements and other materials. 

With that, I would like to welcome Chairman Bernanke. Dr. 

Bernanke is currently serving a second term as Chairman of the 

Board of Governors of the Federal Reserve System. His first term 

began under President Bush in 2006. Before that, Dr. Bernanke 

was Chairman of the Council of Economic Advisers and served as 

a member of the Board of Governors of the Federal Reserve System. 

Chairman Bernanke, please begin your testimony. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you. Chairman Johnson, Senator Crapo, 

and other Members of the Committee, I am pleased to present the 

Federal Reserve’s semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions 

and the outlook before turning to monetary policy. 

The U.S. economy has continued to recover, but economic activity 

appears to have decelerated somewhat during the first half of this 

year. After rising at an annual rate of 2.5 percent in the second 

half of 2011, real GDP increased at a 2-percent rate in the first 

quarter of 2012, and available indicators point to a still smaller 

gain in the second quarter. 

Conditions in the labor market improved during the latter part 

of 2011 and early this year, with the unemployment rate falling 

about a percentage point over that period. However, after running 

at nearly 200,000 per month during the fourth and first quarters, 

the average increase in payroll employment shrank to 75,000 per 

month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job 

creation. At the same time, the jobless rate has recently leveled out 

at just over 8 percent. 

Household spending has continued to advance, but recent data 

indicate a somewhat slower rate of growth in the second quarter. 

Although declines in energy prices are now providing some support 

to consumers’ purchasing power, households remain concerned 

about their employment and income prospects, and their overall 

level of confidence remains relatively low. 

We have seen modest signs of improvement in housing. In part 

because of historically low mortgage rates, both new and existing 

home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent 

months. Construction has increased, especially in the multifamily 

sector. Still, a number of factors continue to impede progress in the 

housing market. On the demand side, many would-be buyers are 

deterred by worries about their own finances or about the economy 

more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or 

because their current mortgages are underwater—that is, they owe 

more than their homes are worth. On the supply side, the large 

number of vacant homes, boosted by the ongoing inflow of foreVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
5 

closed properties, continues to divert demand from new construction. 

After posting strong gains over the second half of 2011 and into 

the first quarter of 2012, manufacturing production has also slowed 

in recent months. Similarly, the rise in real business spending on 

equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate 

rate of growth over the first part of this year. Forward-looking indicators of investment demand—such as surveys of business conditions and capital spending plans—suggest further weakness ahead. 

In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with 

some cooling in the economies of other trading partners, is restraining the demand for U.S. exports. 

At the time of the June meeting of the Federal Open Market 

Committee—FOMC—my colleagues and I projected that, under the 

assumption of appropriate monetary policy, economic growth will 

likely continue at a moderate pace over coming quarters and then 

pick up very gradually. Specifically, our projections for growth in 

real GDP prepared for the meeting had a central tendency of 1.9 

to 2.4 percent for this year and 2.2 to 2.8 percent for 2013. These 

forecasts are lower than those we made in January, reflecting the 

generally disappointing tone of the recent incoming data. In addition, financial strains associated with the crisis in Europe have increased since earlier this year, which—as I already noted—are 

weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of 

other headwinds, including still tight borrowing conditions for some 

businesses and households, and—as I will discuss in more detail 

shortly—the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has 

been typical of previous recoveries. These headwinds should fade 

over time, allowing the economy to grow somewhat more rapidly 

and the unemployment rate to decline toward a more normal level. 

However, given that growth is projected to be not much above the 

rate needed to absorb new entrants into the labor force, the reduction in the unemployment rate seems likely to be frustratingly 

slow. Indeed, the central tendency of participants’ forecasts now 

has the unemployment rate at 7 percent or higher at the end of 

2014. 

The Committee made comparatively small changes in June to its 

projections for inflation. Over the first 3 months of 2012, the price 

index for personal consumption expenditures rose about 3.5 percent 

at an annual rate, boosted by a large increase in retail energy 

prices that in turn reflected the higher cost of crude oil. However, 

the sharp drop in crude oil prices in the past few months has 

brought inflation down. In all, the PCE price index rose at an annual rate of 1.5 percent over the first 5 months of this year, compared with a 2.5 percent rise over 2011 as a whole. The central 

tendency of the Committee’s projections is that inflation will be between 1.2 to 1.7 percent this year and at or below the 2-percent 

level that the Committee judges to be consistent with its statutory 

mandate in 2013 and 2014. 

6 

Participants at the June FOMC meeting indicated that they see 

a higher degree of uncertainty about their forecasts than normal 

and that the risks to economic growth have increased. I would like 

to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis, and the second is the U.S. Fiscal situation. 

Earlier this year, financial strains in the euro area moderated in 

response to a number of constructive steps by the European authorities, including the provision of 3-year bank financing by the 

European Central Bank. However, tensions in euro-area financial 

markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in 

turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, 

greater flexibility in the use of the European financial backstops 

(including, potentially, the flexibility to recapitalize banks directly 

rather than through loans to sovereigns), and movement toward 

unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy remain 

under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United 

States. Moreover, the possibility that the situation in Europe will 

worsen further remains a significant risk to the outlook. 

The Federal Reserve remains in close communication with our 

European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives 

and sufficient resources to resolve the crisis. At the same time, we 

have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have 

been working with U.S. financial firms to ensure they are taking 

steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose 

significant challenges for our financial system and our economy. 

The second important risk to our recovery, as I mentioned, is the 

domestic fiscal situation. As is well known, U.S. Fiscal policies are 

on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At 

the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the 

confluence of tax increases and spending reductions that will take 

effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect—a scenario 

widely referred to as the ‘‘fiscal cliff’’—a shallow recession would 

occur early next year and about 11⁄4 million fewer jobs would be 

created in 2013. These estimates do not incorporate the additional 

negative effects likely to result from public uncertainty about how 

these matters will be resolved. As you recall, market volatility 

spiked and confidence fell last summer, in part as a result of the 

protracted debate about the necessary increase in the debt ceiling. 

7 

Similar effects could ensue as the debt ceiling and other difficult 

fiscal issues come into clearer view toward the end of the year. 

The most effective way that the Congress could help to support 

the economy right now would be to work to address the Nation’s 

fiscal challenges in a way that takes into account both the need for 

long-run sustainability and the fragility of the recovery. Doing so 

earlier rather than later would help reduce uncertainty and boost 

household and business confidence. 

In view of the weaker economic outlook, subdued projected path 

for inflation, and significant downside risks to economic growth, 

the FOMC decided to ease monetary policy at its June meeting by 

continuing its maturity extension program, or MEP, through the 

end of this year. The MEP combines sales of short-term Treasury 

securities with an equivalent amount of purchases of longer-term 

Treasury securities. As a result, it decreases the supply of longerterm Treasury securities available to the public, putting upward 

pressure on the prices of those securities and downward pressure 

on their yields, without affecting the overall size of the Federal Reserve’s balance sheet. By removing additional longer-term Treasury 

securities from the market, the Fed’s asset purchases also induce 

private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their 

prices and lower their yields and thereby making broader financial 

conditions more accommodative. 

Economic growth is also being supported by the exceptionally low 

level of the target range for the Federal funds rate of 0 to 1⁄4 percent and the Committee’s forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January 

meeting, noting that it expects that economic conditions—including 

low rates of resource utilization and a subdued outlook for inflation 

over the medium run—are likely to warrant exceptionally low levels for the Federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of 

progress in reducing unemployment and the downside risks to the 

economic outlook, the Committee made clear at its June meeting 

that it is prepared to take further action as appropriate to promote 

a stronger economic recovery and sustained improvement in labor 

market conditions in a context of price stability. 

Thank you. I would be pleased to take your questions. 

Chairman JOHNSON. Thank you for your testimony. 

We will now begin the questioning of our witness. Will the clerk 

please put 5 minutes on the clock for each Member? 

Chairman Bernanke, I am going to lead off with a question about 

the LIBOR scandal. Last week, you released documents showing 

that the Fed provided early warnings on manipulation in the 

LIBOR market. Then-New York Fed President Timothy Geithner 

raised concerns with President Bush’s Presidential Working Group 

and offered reform recommendations to the British authorities. 

Can you tell the American people, what did you know, when did 

you know it, and what did you do about it? What can we do to restore confidence in the system? 

8 

Mr. BERNANKE. Thank you, Mr. Chairman. As you know, LIBOR 

is a critical benchmark for many financial contracts, so the actions 

of traders and banks that have been disclosed are not only very 

troubling in themselves, but they have the effect of undermining 

public confidence in financial markets. 

Regarding the Federal Reserve’s role, the Federal Reserve Bank 

of New York takes the lead in gathering market intelligence for the 

Federal Reserve System. It was in the process of gathering market 

intelligence when it received information about LIBOR submissions, notably a phone call on April 11, 2008, in which a trade in 

Barclays New York told an employee of the Federal Reserve that 

he thought that Barclays was underreporting its rate. 

About that same time, stories began to appear in the media as 

well. There was an April 16th story in the Wall Street Journal, and 

the Financial Times also had a number of stories. 

I would like to make two preliminary points before talking about 

the Federal Reserve’s response to that information. 

First, the information the Fed received was about the banks possibly submitting low rates in order to avoid appearing weak during 

the period of the crisis. The transcripts of the phone calls that were 

released have no reference to the manipulation of rates for profit 

by derivatives traders, as alleged by the recent decision. 

The second point I would like to make is that this issue was complicated during the crisis by the fact that there were very few 

transactions occurring other than overnight, and so banks were 

asked to report what they would pay if they were borrowing at a 

certain term. It may have been in many cases that transactions 

were not taking place at that term. We will get more information 

on that as the investigations continue. But it is clear that, beyond 

these disclosures, the LIBOR system is structurally flawed, and 

part of the response was to address those flaws. 

The Federal Reserve Bank of New York, after receiving this information from its market inquiries, responded very quickly. It set 

up an internal working group to address the issue. Importantly, it 

informed all the relevant authorities in both the U.K. and the 

United States. Notably, on May 1st, then-President Geithner 

briefed the President’s Working Group, which consisted of the 

Treasury, the Fed, the CFTC, and the SEC, among other participants. The New York Fed briefed the Treasury separately on May 

6th. The PWG meeting was followed up with interagency staff 

briefings to provide more information to the staffs of the various 

agencies. And the New York Fed also communicated with the FSA 

and the Bank of England in the United Kingdom. So there was active effort to report to all the relevant policymakers and enforcement agencies the information that had been received. 

The second step that the Federal Reserve Bank of New York took 

was to develop recommendations to address the structural problems with LIBOR that I mentioned before. The New York Fed released a memorandum, a list of suggested changes that they submitted to the Bank of England on June 1st and following earlier 

discussions with the Bank of England. There were also communications with the British Bankers Association, which is the private 

group that constructs LIBOR, prior to June 1st. 

9 

So the Federal Reserve Bank of New York took the lead here. 

They released a good bit of information. They are looking for additional information, and they will certainly release it if they find it. 

On the Board’s side, we were in supporting mode. We provided 

analytic support, notably about the issues related to the construction of LIBOR. Our staff were in contact with the CFTC in April 

and May to provide analytical support. And Governor Kroszner on 

the Board at that time was in contact with the British authorities 

and the BBA during May and June. 

I think it is important to note that, following the Federal Reserve 

Bank of New York’s disclosures to the appropriate authorities, 

there was rapid followup. The CFTC was making inquiries as early 

as April 2008. It sent requests for information to U.S. banks in the 

fall of 2008. The SEC initiated inquiry in 2009 and the DOJ in 

2010. Currently, the European Commission and a range of other 

foreign regulators, including British regulators, of course, are also 

investigating. And, of course, we know about the June 27th settlement with Barclays. 

So there was a substantial response by the Federal Reserve Bank 

of New York both in terms of informing all the appropriate authorities. That information led to investigations. The Federal Reserve 

Bank of New York also contributed substantially to thinking about 

how to better structure the LIBOR panel and the LIBOR information collection to avoid some of the weaknesses in the system that 

became evident during the crisis. 

Chairman JOHNSON. Chairman Bernanke, what are the factors 

that led you to support the extension of the so-called Operation 

Twist program? And what changes in economic conditions might 

lead you to consider a strong policy response in the future? If further extensions of Operation Twist are not possible in the future, 

what other policy tools are available if the Fed decided to provide 

additional monetary support? 

Mr. BERNANKE. Well, as you know, Mr. Chairman, the Federal 

Reserve in December 2008 brought rates down close to zero, and 

since then we have had to rely on a number of less conventional 

policy tools in order to achieve additional financial accommodation, 

and those included, of course, as was mentioned, quantitative easing programs, and the Operation Twist, which, as I discussed in my 

remarks, also provides extra financial accommodation and provides 

support for the recovery. 

The other type of tools that we have include communication 

tools, notably our forward guidance, which gives the markets some 

sense of where we think—or how long we think that rates will be 

kept at their current low level. 

So those are the principal types of tools that we have. We are 

looking very carefully at the economy, trying to judge whether or 

not the loss of momentum we have seen recently is enduring and 

whether or not the economy is likely to continue to make progress 

toward lower unemployment and more satisfactory labor market 

conditions. 

If that does not occur, obviously we have to consider additional 

steps. We have looked at a range of possible tools, mostly, again, 

involving the balance sheet and communication. The Committee 

meets in a couple of weeks, and we will be discussing those tools. 

10 

We have not really come to a specific choice at this point, but we 

are looking for ways to address the weakness in the economy 

should more action be needed to promote a sustained recovery in 

the labor market. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Chairman Bernanke, ever since the Dodd-Frank conference, 

there has been a debate about whether nonfinancial end users were 

exempt from margin reforms. Then-Chairman Dodd and Chairman 

Lincoln acknowledged that the language for end users was not perfect and tried to clarify the intent of the language with a joint letter. In the letter, they stated, ‘‘The legislation does not authorize 

the regulators to impose margin on end users, those exempt entities that use swaps to hedge or mitigate commercial risk.’’ 

In April 2011, prudential regulator issued a joint proposal that 

would, in fact, require nonfinancial end users to post margin to 

their bank counterparties. 

According to the proposed rule, the proposal to require margin 

stems directly from what they view to be a legal obligation under 

Title VII. Recently, I offered an amendment with Senator Johanns 

to fulfill congressional intent by providing an explicit exemption 

from margin requirements for nonfinancial end users that qualify 

for the clearing exemption. The amendment is identical to the 

House bill which passed the House by a vote of 370–24. 

Is it accurate, in your opinion, that regardless of congressional 

intent, the banking regulator view the plain language of the statute as requiring them to impose some kind of margin requirement 

on nonfinancial end users unless Congress changes the statute? 

Mr. BERNANKE. We believe that the statute does require us to 

impose some type of margin requirement. We tried to mitigate the 

effect as much as possible by allowing for exemptions when the 

credit risk associated with the margin was viewed as being sufficiently small. So many small end users would be exempt in practice. 

Senator CRAPO. Do you agree that the nonfinancial end users’ 

hedging does not contribute to systemic risk, that the economic 

benefits from their risk management activity—excuse me, that the 

economy benefits from their hedging activity and that it is appropriate for Congress to provide an explicit exemption from margin 

requirements for nonfinancial end users that qualify for the clearing exemption? 

Mr. BERNANKE. I certainly agree that nonfinancial end users 

benefit and that the economy benefits from the use of derivatives. 

It seems to be the sense of a large portion of the Congress that that 

exemption should be made explicit, and speaking for the Federal 

Reserve, we are very comfortable with that proposal. 

Senator CRAPO. Well, thank you, Mr. Chairman. 

I want to shift gears for just a minute back to the question that 

the Chairman asked with regard to what actions you can take. You 

indicated in your response to his question about what tools you still 

have and how you may approach them that you still have some 

possible tools to deal with. There is obviously a lot of speculation 

and concern about whether you are considering another round of 

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tive quantitative easing has been to date and what more can be 

done. 

Could you discuss for us a moment how effective you feel that 

the quantitative easing has been so far and whether you feel that 

it is one of those tools that you should seriously consider going forward? 

Mr. BERNANKE. So as I mentioned to the Chairman, we ran out 

of space to lower short-term rates in the normal way, and we had 

to look for other tools. Like a number of other major central banks, 

we have used asset purchases as a way of providing additional support to the economy. 

Economists differ on terms of how effective the tools have been. 

My own assessment is that the quantitative easing and the Operation Twist so-called tools have been effective in easing financial 

conditions and in promoting strength in the economy, and it was 

most evident in the so-called QE1 in March 2009, which was followed a few months later by the beginning of the recovery and, by 

a few days, by the trough in the stock market. 

QE2 was certainly effective at addressing what was beginning to 

become a worrisome amount of risk of deflation in the fall of 2010. 

That issue was addressed. My view and the view of our analysts 

at the Fed is that it also contributed to economic growth. It is hard 

to judge because it depends on what you think would have happened in the absence of those actions. 

So there is a range of views about the efficacy of these programs. 

There are also questions about side effects, risks that might be associated with their use, and, therefore, I think they should not be 

used lightly. Nevertheless, my own view is that these tools and 

other nonstandard tools still do have some capacity to support the 

economy, and what we will be looking at in thinking about this is, 

I think, really two things: The first is, as mentioned in our statement, whether or not there is, in fact, a sustained recovery going 

on in the labor market or are we stuck in the mud, so to speak, 

in terms of employment. That is, of course, our maximum employment mandate. And then the other issue would be price stability, 

and notably we would certainly want to react against any increase 

in deflation risk. 

Senator CRAPO. Thank you, 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman, and thank 

you, Chairman Bernanke. 

Let me return for a moment to the issue of LIBOR. Can you give 

us and the millions of Americans who depend upon LIBOR because 

it tells them how much they have to pay for their car loan or their 

student loan, et cetera, that the current LIBOR is reliable, that the 

changes that were made or suggested by the New York Fed or others have been put in place, and that this is an index that is, in fact, 

reliable and not being subject to manipulation going forward? 

Mr. BERNANKE. I cannot give that assurance with full confidence 

because the British Bankers Association did not adopt most of the 

suggestions that were made by the Federal Reserve Bank of New 

York. They made a relatively small number of changes. I think it 

is likely that concerns are less now because we are no longer in the 

crisis period, and that, as I mentioned, was a period in which 

12 

transactions and many maturities were not taking place. I would 

like to see additional reforms to the LIBOR process, assuming that 

LIBOR will continue to be a benchmark for financial contracts. 

Alternatively, there are a number of people looking at alternative 

benchmarks, like repo rates or the overnight index swap rate or 

other types of interest rates which have the advantage over LIBOR 

that they are market rates as opposed to simply reported rates. 

Senator REED. What steps are you taking, though, given that 

concern you have expressed, right now, not retrospectively, how we 

got here and who did what to do, but to provide as much certainty 

as you can—there are several banking institutions you directly regulate that contribute to LIBOR. There is your relationship directly 

with the Bank of England. What are you doing—not just you personally but the Federal Reserve—to ensure this index is appropriate? And, again, I encourage you to study these alternatives, but 

the LIBOR is so deeply interwoven and embedded into thousands 

and thousands of contractual arrangements throughout the world 

that it is going to be hard to next week shift to something else. 

Mr. BERNANKE. Well, again, I think we are and need to continue 

advocating for reforms to the LIBOR process. It is constructed by 

a private organization in the U.K., and so our direct ability to influence that is limited. 

With respect to the three banks in the United States which contribute to the LIBOR panel, two of those banks have reported in 

their SEC filings that they have been asked for information by investigating agencies. We are following that very carefully. We will 

see what happens, and we will provide any support and help we 

can to those investigators. 

Senator REED. Let me turn to more the monetary issue. The Federal Reserve has been in some cases sort of pursuing aggressive 

monetary policy while fiscal policy has not kept up in some respects, and I presume you are prepared to continue to do that given 

the unemployment numbers, inflation numbers, et cetera. That is 

regardless of what we are doing on the fiscal end. 

Mr. BERNANKE. Our mandate tells us to do the best we can for 

employment and price stability, and we will continue to do that. Of 

course, we would appreciate other policymakers playing appropriate roles themselves as well. 

Senator REED. One of the comments that you made—and will 

give you a chance to amplify it—is that there will be a need, I 

think in your view, next year for continued stimulus, for want of 

a better term, if we are going to reduce unemployment, which is 

one of your mandates, and that if we reach a solution that is heavy 

on cuts to spending, that is heavy perhaps even on cuts to entitlements, that would not provide stimulus, in my view, and it could 

further impact unemployment in the country. Is that an accurate 

assessment? 

Mr. BERNANKE. Well, the position we have taken is, I would say, 

at a first cut is do no harm. What we need is a strategy which addresses the long-run sustainability issues. We cannot forget about 

that. At the same time, if the fiscal cliff is allowed to happen, it 

will certainly have major negative effects on the recovery. The 

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ommendations, and we feel that is a reasonable balance between 

the short and long term. 

Senator REED. Some of the specific issues that we face at the end 

of the year are filling a gap in 2013 in terms of spending, in terms 

of revenues. And if that 2013, if we avoid the cliff by taking another route, but that route significantly decreases spending, decreases other stimulative effects, would your view be that we could 

have avoided a cliff but still found ourselves in a very perilous economic situation because employment will continue to decline? 

Mr. BERNANKE. It is a question of the timeframe. In the very 

near term, we already have a lot of fiscal drag coming from State 

and local governments, for example, as you know, and some coming 

inevitably from the Federal side. So in no way am I saying that we 

should not be making strong efforts to achieve long-term sustainability and make a credible plan as soon as possible for doing that. 

But it would be better to make that plan soon but to have the effects come in more gradually to allow the recovery the air it needs 

in the short term. 

Senator REED. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. And thank you, Mr. 

Chairman, for being here. I was listening to the last dialog there, 

and I know in your statement you talked about the fiscal cliff that 

is coming up. And to be clear about the spending reductions, it is 

$1.2 trillion over the next 10 years that the sequestration amounts 

to. We are going to spend about $45 to $47 trillion of taxpayer 

money over the next 10 years. And while I agree we should come 

up with a much better solution that deals with entitlements and 

revenues and hopefully something that is much larger, are you seriously concerned that we are talking about $108 billion next year 

in reductions, half between defense, half in other mandatory spending, you are seriously concerned that that small amount of spending reductions is something that is going to damage the economy? 

Mr. BERNANKE. The fiscal cliff includes both the spending reductions and the tax increases. 

Senator CORKER. I am talking about just the spending piece. It 

is hard for me to believe—— 

Mr. BERNANKE. Obviously, a smaller fiscal contraction will have 

a smaller effect. But, you know, I do not want to make a judgment 

about—I realize it is very contentious, taxes versus spending. I do 

not want to get into that. But, clearly, a smaller reduction in the 

fiscal position would have less effect on the economy than a larger 

one. 

Senator CORKER. Yes. But as we look at the economy, would you 

not also say that the best thing we could do to stimulate the economy, including any actions the Fed might take, is for us to have 

real balanced fiscal reform? Is that not the thing that would cause 

our economy to take off more than anything else and alleviate the 

uncertainty that people have, the investing community? 

Mr. BERNANKE. Fiscal reform is very important, not only the control of deficits over the long period but also the quality of fiscal policy: What are we spending our money on? What does our Tax Code 

look like? I think those things are extremely important. 

14 

But I think the way the current law is written, we have the maximum impact right in the very short run on January 1, 2013, and 

much less happening over the next decade or the next two decades. 

So I am not advocating an overall increase in fiscal spending or 

anything like that. I am just saying that the timing should be adjusted to allow the recovery a little bit more space to continue, but 

to make a serious efforts to improve our fiscal policy over the next 

decade. 

Senator CORKER. So, look, I agree that we should have a better 

policy than we now have, and I think most of the people on this 

dais are trying to seek that, and it is unbelievable to me that we 

have not already done that. But I think, on the other hand, for us 

to potentially kick the can down the road on sequestration creates 

even more—if we do not come up with another solution, which I 

hope we will, but to say that you are recommending in some ways 

that we kick the can down the road, not do sequestration, and 

make us look even more irresponsible to me is worse than the $108 

billion that might be reduced out of the spending that the Federal 

Government is going to be doing this next year. Do you understand 

what I am saying? 

Mr. BERNANKE. Yes, sir, and I think just delaying everything, 

just saying we are not going to do it, put it off a year, I think that 

would be a very bad outcome. 

Senator CORKER. So I think the actions that you are taking at 

the Fed—and I understand you have a dual mandate. I think we 

should have a single mandate, and I know we have talked about 

that. I know that it creates bipolar activity because you are trying 

to juggle the two, and we have created that, not you. But I think 

the actions that you are taking really take the—or you are potentially considering—I know QE2 was in response to potential deflation. I think further actions actually take the impetus off us to act 

responsibly. And I candidly wish we had a Chairman of the Fed 

that sometimes would say, look, we are not doing anything else, we 

are pushing rope, and it is up to you to act responsibly to deal with 

these fiscal issues, quit looking to us. 

I mean, are you tempted ever to say that to Congress? Would you 

not say that now? 

Mr. BERNANKE. I do not think that is my responsibility. I have 

been assigned to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in 

charge here, not the Federal Reserve. 

Senator CORKER. A very politic answer. I would say that, you 

know, you have members that are concerned about the policies that 

you are putting in place being disruptive. You do have members 

who are concerned about that. Is that correct? 

Mr. BERNANKE. We have a range of views on the Committee, yes. 

Senator CORKER. And let me ask it a different way. If we were 

to act responsible and to do something in a balanced way that deal 

with not only the next 10 years but 20 and 30, which most of the 

plans that have been in the mainstream do that, would that alleviate the need possibly for the Fed to consider additional quantitative easing? 

Mr. BERNANKE. Well, possibly. As I said, the fiscal issues are a 

major concern, a major downside risk, and if Congress addressed 

15 

those issues and the economy was—the outlook was better, then it 

is certainly very possible that that would abrogate any need to take 

further action. 

Senator CORKER. You have been a little vague on what additional 

tools you have, and I understand that. I know the whole world 

watches when you speak. It does appear that most of the toolkit 

is utilized at this moment. 

If you were to consider additional tools at the Fed in the next 

meeting, what would be the range of options that might exist with 

rates being where they are today and Operation Twist being in effect? I mean, what else is there that the Fed can responsibly do 

since the Fed is the biggest lender to the Federal Government already, far more than China and Japan? 

Mr. BERNANKE. Well, there are a range of possibilities, and I do 

not want to give any signal that we are choosing one—— 

Senator CORKER. Well, what is the range? 

Mr. BERNANKE. The logical range includes different types of purchase programs that could include Treasurys or include Treasurys 

and mortgage-backed securities. Those are the two things we are 

allowed to buy. We could also use our discount window for lending 

purposes, but, you know, that is another possibility. We could use 

communication to talk about our future plans regarding rates or 

our balance sheet. And a possibility that we have discussed in the 

past is cutting the interest rate we pay in excess reserves. That is 

a range of things that we could do. Each one of them has costs and 

benefits, and that is an important part of the calculation. 

Senator CORKER. Thank you for your service and for being here. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Well, thank you, Mr. Chairman. 

I, too, thank you for your service. I think you have done a superb 

job in one of the most difficult periods to be Chairman of the Fed. 

Now, I do not quite agree with my good friend Mr. Corker. I 

think you have told Congress what you want us to do in your own 

Fed-speak way of doing it. Just last month, you said you would be 

‘‘more comfortable if Congress took off some of the burden in terms 

of helping the Fed in our economic recovery.’’ 

What he meant there is not deficit reduction. He meant stimulus. 

He meant some kind of stimulus, which is the opposite side of the 

Fed. 

Now, I agree with you. Under current conditions, fiscal policy 

should be our first choice. It would be more effective. Unfortunately, we can talk all we want—everyone gives speeches how fiscal policy should be the way to go, and we do not do anything. We 

have had a hard getting the cooperation necessary to get anything 

done on the fiscal side. We have tried tax cuts, which supposedly 

our colleagues on the other side of the aisle like. We have tried increased investments in infrastructure, a traditional way of priming 

the pump. We have tried support for State and local governments 

where jobs are declining, and we have run into opposition on all 

fronts. 

Just last week, on two things that our colleagues have often supported—a tax credit for job creation and accelerated depreciation 

for capital purchases—we got no support. 

16 

So the bottom line is very simple. We are not going to get the 

fiscal relief we want, at least over the next short while. Maybe 

after November we will. 

So given the political realities—and the President has been calling for this repeatedly. When the President last fall proposed shortterm fiscal support combined with long-term deficit reduction, 

which to me is the right way to go, a 10-year plan that really reduces our deficit but a 1- or 2-year plan that pumps the economy 

up a little bit, he did not get a single Republican vote. And we 

know the reality. You cannot do it if it is not bipartisan. 

So given the political realities, Mr. Chairman, particularly in this 

election year, I am afraid the Fed is the only game in town. And 

I would urge you to take whatever actions you think would be most 

helpful in supporting a stronger economic recovery. 

You have received some harsh criticism for past efforts to help 

the economy. Republican leadership in the House and Senate, even 

as they were blocking jobs bills in Congress, sent you a letter opposing more monetary support as well. Well, I would urge you now 

more than ever to take whatever actions are warranted by the economic conditions, regardless of the political pressure. 

To that end, the minutes of your last FOMC meeting notes that 

the forecast for real GDP growth was revised down, the unemployment rate remained elevated, and consumer price inflation declined. Moreover, the economy showed that not a single member of 

the Committee thought employment would be back to normal levels 

by the end of 2014. Not a single member forecast inflation even 

modestly above your 2-percent target in the same timeframe. So 

the recession is deeper, more prolonged, and stickier than anyone 

thought. And let us remember, the Fed has a dual mandate: first 

and foremost to guard against inflation, but also to keep unemployment up and—sorry, to keep employment up and unemployment 

down. So, to me, these conditions would certainly motivate the Fed 

to seriously consider taking further action to bolster the economy. 

What is your opinion about that? 

Mr. BERNANKE. We take the dual mandate very seriously. We 

will act in an apolitical, nonpartisan manner to do what is necessary for the economy. We have said we are prepared to take further action. The complication, of course, is that we are dealing with 

less conventional tools, and we have to make assessments about 

their efficacy and whatever costs and risks may be associated with 

them. But it is very important that we see sustained progress in 

the labor market and avoid deflation risk, and those are the things 

we will be looking at as the Committee meets later this month and 

later this summer. 

Senator SCHUMER. And you still do—I mean, you have used QE1 

and QE2, but you still have some other tools in your toolkit? 

Mr. BERNANKE. I believe we do, yes. 

Senator SCHUMER. OK. And do you agree that at least for the 

next few years the danger of inflation is quite low? 

Mr. BERNANKE. Well, our projection of inflation is that it will be 

close to or below our 2-percent target, and, yes, so I think inflation 

risk is relatively low now. Not everyone agrees with that, but my 

personal opinion is that that risk is reasonably low right now. And 

indeed, as I mentioned, there is a modest risk—not a large risk but 

17 

a modest risk—of going in the other direction, which is toward the 

deflationary side. 

Senator SCHUMER. And you certainly agree that unemployment 

has been too high and is sticky, and despite two false starts, we 

are having a much rougher time than we ever imagined getting unemployment down? 

Mr. BERNANKE. Yes, that is true. 

Senator SCHUMER. So get to work, Mr. Chairman. 

Chairman JOHNSON. Senator DeMint. 

Senator DEMINT. Thank you. Thank you, Mr. Chairman, for 

being here. It is interesting to hear my colleagues talk, and they 

seem puzzled why our short-term temporary stimulus gimmicks do 

not seem to work. And by any analysis, the cliff that is at the end 

of this year was created by all of these temporary policies that expire at the same time. 

Clearly, we are throwing a lot on you, but at the same time it 

appears that we are forcing you into temporary, short-term ideas. 

And I am concerned that—you mentioned costs and benefits, some 

of the things that you are clearly considering, such as quantitative 

easing, as costs that we do not talk about, at least on our side, as 

well as keeping the interest rates low. I mean, you are well aware 

that keeping interest rates where they are is costing Americans 

about $400 billion a year in lost interest on any savings that they 

might have. So there is a real cost, and over the last 4 years, probably about $1 trillion in loss. So people who are actually trying to 

save and put aside dollars are on a negative treadmill in the sense 

that they are losing the value on their dollars. So there is a cost 

to that stimulus effect. And also a quantitative easing, which you 

are clearly considering, our own Federal Reserve Bank of New 

York estimates that about 50 percent of the value of the S&P over 

the last decade is related to Fed action and the buildup around Fed 

action of quantitative easing. 

My concern now is that what we are seeing is not an increase 

in the value of stock but a projection and a loss of value of our dollar. And while we talk about no inflation, I think what we are talking about is no visible inflation at this time, because clearly, if we 

are printing more money to buy more of our national debt—and I 

think you will agree the Federal Reserve through intermediaries 

has bought over half of our debt the last couple of years—we are 

diluting the value of our dollar over time. And while it may not 

show up today or tomorrow, it is inevitable that it will show up. 

And I think we see that in the reflection of the price of stocks because it is obvious that that does not reflect long-term projections 

of value and profits as much as it does playing a market and what 

is coming out of the Federal Reserve. 

So my concern very much now is another announcement of quantitative easing, which might inflate the stock market temporarily, 

but another short-term effort that might help employment in the 

short term but actually reduce the value of the dollar and, therefore, everything we have worked for here in the country. So how 

are you gauging the cost of another round of quantitative easing? 

Mr. BERNANKE. Well, let me respond to the specifics that you 

raised. On savings, we understand that low interest rates are a 

hardship for many people. The reason the interest rates are low, 

18 

of course, is that we are trying to promote a recovery in the economy. People hold fixed-income types of securities, like CDs or 

Treasury bonds, but they also hold stocks or corporate bonds or 

small businesses or other types of assets which depend on the 

strength of the economy. And raising interest rates might help 

some folks, but if it caused the economy to weaken considerably, 

it would be bad for investors broadly speaking. 

So what we are trying to do, of course, as our mandate suggests 

is to strengthen the economy, which in turn should make America 

a more attractive place to invest, provide higher returns for everyone investing in the United States. 

On the dollar and inflation, I appreciate your concern, and that 

is obviously one of the things we have paid very close attention to. 

We have not seen inflation yet, though, and the dollar has been, 

in fact, recently a good bit stronger. And we are comfortable that 

we have the tools to unwind these policies in a way that will not 

threaten inflation. But as I said to Senator Schumer, we take both 

sides of the mandate very seriously, and as we are looking to try 

to help reduce unemployment, we also want to be confident that we 

maintain price stability in the United States. And thus far we have 

been successful in doing that. 

Senator DEMINT. The dollar is stronger relative to the euro, but 

comparative values inside the United States just cause some concerns at this point. But, again, I appreciate what you do. I would 

just ask caution in diluting our dollar even further for temporary 

action. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Thank you, Chairman Bernanke, for your service. I want to 

speak to you about interest rate manipulations by large banks 

since the Fed plays a role, a key role in ensuring the integrity of 

interest rates that affect consumers, small businesses, and cities 

and towns across the country. 

You know, I look at this most recent set of allegations on the 

LIBOR manipulation, and once again it exposes to me a culture of 

greed, a culture of cheating, of lying, at least at one large bank, 

and probably many more, which is why nine of my colleagues and 

I wrote to you and other banking regulators and the Department 

of Justice last week asking for a robust investigation in the role of 

these banks and how this ultimately affected consumers in this 

country, investors in this country, cities in this country, because 

LIBOR is a very—it is far more than a benchmark. It is a very significant indicator here that is used. 

I know that the Federal Reserve Bank of Cleveland found that 

45 percent of prime adjustable rate mortgages are indexed to 

LIBOR; 80 percent of the subprime ARMs use LIBOR as a benchmark. So this is a huge issue, and it again goes to the integrity of 

our financial system, and the lack of faith, I think, increasingly 

that the American public and, for that fact, many of us are having 

in the system. 

I looked at the internal emails during 2005 and 2007 of Barclays’ 

derivative traders asking other employees to submit false survey 

responses in order to benefit their trading positions, changing 

19 

them, preferring certain LIBOR outcomes on certain days, sometimes for it to be higher, sometimes for it to be lower, depending 

upon how it would benefit their position. 

Now, I look at this, and I say to myself this is about trying to 

manipulate a key economic indicator for the purposes of profit. Am 

I wrong on that? 

Mr. BERNANKE. No, I agree absolutely. This is unacceptable behavior. 

Senator MENENDEZ. Well, let me ask you, clearly, then, banks 

like Barclays were trying to profit from the LIBOR manipulation, 

but that profit came not at, you know—actually, it came at the expense of the public in general. 

Mr. BERNANKE. Some of the public. It is actually an interesting 

question. You mentioned borrowers. Borrowers may have benefited 

because LIBOR was underreported. We will probably find out via 

a number of lawsuits that have been filed, and investigations, exactly how much effect there was. 

Senator MENENDEZ. But if you got caught in that period of time 

in which the traders wanted the higher LIBOR and that was a 

time in which your adjustment was going on, you had a detriment 

to yourself. Investors obviously had a detriment in not knowing the 

integrity of the institutions, not knowing the—you know, LIBOR, 

if it is lower, it means things are working pretty well. When it goes 

higher, it is sort of like a warning sign, is it not? 

Mr. BERNANKE. I am not defending it. I think it is a major problem for our financial system and for the confidence in the financial 

system, and we need to address it. 

Senator MENENDEZ. So how do we address it? For example, I 

know that some of my colleagues here bristle at regulation, but it 

seems that this is an industry that on its own will not work with 

the integrity that the public deserves. We are talking about pension fund investments, mutual fund investments, investments by 

regular investors, as well as the consequences to consumers. I am 

sure that we are talking about billions in effect, if not trillions in 

effect. 

For example, do you think that we need additional internal controls or firewalls between reporting personnel and trading employees at these banks so that we do not have this work to manipulate 

as one example of—I would like to hear what it is we are going to 

do now that we know all of this, and may have known it before. 

We are we going to do to ensure the integrity of this banking system? 

Mr. BERNANKE. Well, first, it is going to have to be an international effort because—LIBOR is constructed by the U.K. organization, and, of course, LIBOR is constructed for about ten different 

currencies as well. So it has to be an international effort. 

I think there are broadly two approaches. One would be to fix 

LIBOR, to make changes to it to increase the visibility, to reduce 

the ability of individual banks or traders to affect the overall 

LIBOR, and to increase monitoring of the reporting process that is 

done. So that would be one strategy. 

The other strategy, which many people are thinking about, is 

going from what is essentially a reported rate to an observable 

market rate as the index, and there are a number of possible canVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
20 

didates that have been advanced that might ultimately replace 

LIBOR. As you point out, though, LIBOR is very deeply ingrained 

in many contracts, and so that change will be not a simple one to 

make. But I agree with you that we need to address this problem. 

Senator MENENDEZ. Well, I would look forward to the Fed’s leadership in this regard and suggestions of how we, in fact, make a 

system that cannot be manipulated, that has consequences to millions of consumers, investors, pension funds, municipalities, counties, Governments, all affected by LIBOR. And so it may be an 

international response that we need, but we need to understand 

what we can do here in the United States to ensure for these investors and these consumers. 

Chairman JOHNSON. Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman, and thank you, 

Chairman Bernanke, for your report. 

On the LIBOR issue, from everything I have read, reports as well 

as documents, it seems like in 2008, when the New York Fed 

learned of this potential scandal, potential misreporting, it reacted 

on the policy side with various discussions, recommendations, with 

their British counterparts. I have not seen anything about it reacting as a regulator of U.S. large banks. Did it do anything to investigate whether U.S. banks were guilty of the same practice? 

Mr. BERNANKE. Well, what it did was it informed the responsible 

authorities—the CFTC in particular—very quickly. The Bank of 

New York made a presentation to the President’s Working Group 

that included the SEC and the CFTC, provided supporting information, as did the Board. So the investigations took place, but they 

were taken up quite quickly by not the Fed, which is a safety and 

soundness regulator, but by the authorities that had the most direct responsibility for those issues. 

I have to say that the Federal Reserve Bank of New York is still 

investigating the situation itself, digging up documents and the 

like. I do not know what communications or conversations were 

had with the three U.S. banks that were on the panel, but the actual enforcement actions were taken by the CFTC and SEC and 

DOJ. 

Senator VITTER. So as we sit here today, do we know definitively 

that no U.S. banks were guilty of the same manipulation? 

Mr. BERNANKE. No, we do not know that. 

Senator VITTER. Well, it seems to me that goes back to my question and my concern. If we do not know that, it seems like somebody dropped the ball, the fact that we are 4 years later and we 

do not know that. 

Mr. BERNANKE. Well, I mean, as I said, two banks have reported 

that they have been asked to disclose information to the investigating agencies, and so a robust process is certainly underway. 

Senator VITTER. It is underway 4 years later. My point is that 

knowledge of this occurred in 2008, and neither the New York Fed 

nor other regulators did a sufficient investigation so that we could 

know one way or the other as we speak today 4 years later that 

the U.S. banks did not do the same thing. Am I missing something? 

Mr. BERNANKE. Only that, again, I think the responsibility of the 

New York Fed was to make sure that the appropriate authorities 

had the information, which is what they did. 

21 

Senator VITTER. Do you think it was a reasonable responsibility 

for the New York Fed to follow up and say did U.S. banks that we 

are a primary regulator of do the same thing? 

Mr. BERNANKE. I do not know what conversations they had. Of 

course, the New York Fed is the regulator of some banks and of 

holding companies. There are other regulators, like the OCC and 

so on. 

Senator VITTER. But certainly the New York Fed is the primary 

regulator of the biggest banks with regard to—U.S. banks engaged 

in LIBOR that we are talking about, correct? 

Mr. BERNANKE. Two of the three. 

Senator VITTER. Right. Let me move on to another topic that I 

am concerned about. The Fed is in the process of rulemaking with 

regard to the term ‘‘predominantly engaged in financial activities’’ 

under Dodd-Frank. The rule that has been published and the Fed 

is now taking comments on seems to me absolutely ignores a very 

specific criteria that we in Congress placed in Dodd-Frank in Section 102(a)(6). I know about it because it was a Vitter-Pryor 

amendment, and it is very specific. It uses an 85-percent test. And 

it seems to me the rule the Fed is in the process of adopting ignores that specific metric. 

How can the Fed adopt a rule that ignores specific statutory language? 

Mr. BERNANKE. We would not want to do that, and I will check 

on that question for you. 

Senator VITTER. OK. If you could check on that, again, it is 

102(a)(6). And I believe the Fed rule that has been published for 

comment ignores a specific metric in the law, which I would short 

term call the 85-percent rule, which was a Vitter-Pryor amendment, which is in final law. 

Mr. BERNANKE. Thank you for that. 

Senator VITTER. Thank you very much. 

Finally, capital standards for the largest banks. As I have read 

your comments in the past, it seems to me that you support somewhat larger capital requirements for mega banks, but that you 

seem to think where we are headed, about 9.5 percent under Basel 

III, which is about 2.5 percent more for the mega banks, is roughly 

appropriate. Is that a fair summary or not? 

Mr. BERNANKE. Well, there is an international standard which it 

is not the same for every big bank. It starts at virtually zero for 

the medium-size banks and then increases up to the largest banks. 

But it is based on some formulas and some calculations that try to 

establish parity across banks around the world. 

Senator VITTER. Well, I guess what I am asking is: To the extent 

that imposes higher capital standards on the largest U.S. banks, do 

you think those higher standards are good enough to ensure stability in the future and protection in the future? 

Mr. BERNANKE. I think they are very useful, very important. 

Basel III in general is going to increase everybody’s capital and increase the quality of capital, and this will mean that the largest 

banks have even additional capital. But it is not just capital. It is 

also going to be the market discipline that comes from orderly liquidation authority, stronger supervision, liquidity requirements, 

and so on. I think it is extremely important that we address too 

22 

big to fail, and this is one way to make banks take into account 

that their own size does impose a cost on the rest of society and 

make them respond to that. 

Senator VITTER. Beyond the path we are on, do you think we 

should be looking at higher capital requirements for the biggest 

banks? 

Mr. BERNANKE. Well, we will continue to have international discussions. It has been our approach to try to have capital requirements that are broadly consistent with the international standards, 

and these numbers were based on calculations that drew from the 

crisis. But we are always open to further discussions, and we will 

see how effects of the higher capital work through the credit system as we go forward. We are phasing this in relatively slowly, as 

you know, so we will get a chance to see what the impact is on 

banks and credit costs. 

Senator VITTER. My time is up, but I would encourage you to 

look at that, and I would encourage you to place safety and stability ahead of—I understand the desire for uniformity across the 

globe, but I do not think it should trump what is best for—— 

Mr. BERNANKE. You are looking forward to higher capital requirements. 

Senator VITTER. Yes. 

Chairman JOHNSON. Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. 

Let me add my welcome to Chairman Bernanke to the Committee and to thank you so much for your tireless leadership in 

these challenging times. 

Recent economic events in Europe and China show us how dependent the United States is on the international markets when it 

comes to our economic recovery. Despite concerns about the overall 

rate of recovery, some sectors are beginning to turn around and we 

are beginning to see some bright spots, as indicated in your opening statement. 

Hawaii, for example, had record tourism numbers in May, and 

nationally we see spending by foreign travelers continue to rise, 

helping to reduce our deficit. 

My question is: How do you think that current policies and those 

regarding tourism and exports have affected the recovery? And, 

also, do you have any suggestions on how to further encourage 

growth in these areas? 

Mr. BERNANKE. Well, first, Senator, tourism has been something 

of a bright spot. We have seen improvements in tourism in not just 

Hawaii but in a number of places around the country. And you 

mentioned the international trade deficit. People may not appreciate that when a foreigner comes and visits Hawaii, that actually 

counts as a U.S. export because we are exporting the tourism services. And the export of tourism services has actually been growing 

very quickly, something like 14 percent in the last year, faster than 

other types of exports. And so it contributes to our trade balance 

as well as to overall economic activity. So it is a positive. 

With respect to policies that address it, you know, I think there 

is a lot of incentive. We see that individual States, for example, 

compete with each other to try to attract visitors. But we can consider issues like visa policies; we can look at any tax or other impliVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
23 

cations that might affect the cost of tourism. So it is an area where 

I think there is a lot of benefit and a lot of scope for economic benefit to Hawaii and the rest of the country. And it has so far been, 

as I said, a bright spot among the various service industries that 

we have. 

Senator AKAKA. Thank you. 

As you know, I am concerned with the well-being of consumers. 

During previous hearings, you and I have discussed the importance 

of improving financial literacy to empower consumers while we 

work to grow the economy. So my question is: In what ways have 

you seen financial decision making by individual Americans improve during this recovery? And what more needs to be done, do 

you think? 

Mr. BERNANKE. Well, there are two sides to improving decision 

making. On the one hand, there is education and that effort has 

continued. The Federal Reserve is continuing its efforts toward promoting financial literacy and economic education. I have an upcoming meeting with teachers across the country, and I will be talking 

about financial literacy and answering their questions and talking 

about how to introduce students to these topics. 

Some of the activities that we had have moved over to the CFPB, 

which some personnel and some functions went over there, but 

they are also engaged in those activities. So education is one side. 

On the other side, it is important that disclosures and the types 

of products that are offered are such that people have a reasonable 

chance of understanding what it is that they are buying or investing in. The Federal Reserve pioneered a few years ago the use of 

consumer testing to improve disclosures for credit card statements 

and a variety of other types of disclosures, and we hope to see that 

type of activity continue. 

I think in general that the experience of the crisis has made 

many people more aware of the need to be financially literate, 

schools more aware, and more cautious as well. But it is an ongoing battle. We cannot declare victory. We have to continue to work 

to try to make sure that both kids in school and also adults who 

are making financial decisions have access to good advice and good 

education. 

Senator AKAKA. Thank you very much for your responses, Mr. 

Chairman. 

Chairman JOHNSON. Senator Johanns. 

Senator JOHANNS. Mr. Chairman, good to see you again. 

The forecasts that you have testified about today I am assuming 

do not factor in the results of the fiscal cliff that is headed our way 

between now and the end of the year. Is that a safe assumption? 

Mr. BERNANKE. That is correct. 

Senator JOHANNS. So because of the fact that all of the various 

items that are included in the so-called fiscal cliff would take affirmative action by Congress to pull us back, which typically means 

60 votes in the Senate, a majority in the House, a Presidential signature, my assumption is that if that does not happen, we get 

caught in a situation where those forecasts would be revised yet 

again, and it would be even more pessimistic than your testimony 

today. Would that be correct? 

Mr. BERNANKE. Absolutely. 

24 

Senator JOHANNS. As you think about the sequester, the $1 trillion sequester, as you think about returning to the 2001, 2003 tax 

policy, as you think about the estate tax and all of the various factors that we are looking at between now and the end of the year, 

if you were to give a recommendation to Congress as to where to 

act, would it be act on everything or is there a priority that you 

would set for action? 

Mr. BERNANKE. No. I think the choice is between spending and 

taxes, and the mix and the kinds of taxes and so on, I think that 

is really a congressional responsibility. I am just pointing to the 

collective impact of all these different things happening at the 

same time, and there may be many different ways to mitigate that 

effect, and I am sure Members of Congress have different views on 

the best way to do that, which is one of the problems, because you 

are going to have to come to some kind of agreement. 

So, no, I do not have a specific recommendation other than to 

think about not just the individual policies but their collective impact if they all happen at the same time. 

Senator JOHANNS. Let me talk to you a little bit about the mitigation piece of this. As you know, some of us—in fact, some of us 

on this Banking Committee—have been meeting for many, many 

months—in fact, for some members they have been meeting for 

over a year—talking about an approach, and I would guess the best 

way of describing that is the outline for the approach is the Simpson-Bowles plan, which came out a year ago. 

Thinking about that plan, would you be comfortable in testifying 

today that that at least is an acceptable alternative to what we are 

facing between now and the end of the year if Congress could see 

its way to adopting that approach? 

Mr. BERNANKE. Well, it does have a profile that seems reasonable in terms of addressing longer-term sustainability over the 

longer period. But, again, I do not want to endorse the individual 

components, in part because, again, choices between taxes and 

spending are a congressional prerogative, and also because the 

Bowles-Simpson plan is not really a complete plan. It does not, for 

example, say very much about health care and how those costs will 

be controlled, but it does have the feature that, like many other 

plans that have been suggested—and there are others, Rivlin and 

others as well—introduce this discipline, fiscal discipline, in a rigorous way but over a longer period of time to allow the economy 

to adjust more easily. 

Senator JOHANNS. You know, Mr. Chairman, I think if the average citizen were to listen in on the political debate that will occur 

between now and November—and political debate is certainly appropriate; that is how democracies work—you would get very discouraged. But having said that, give us your thoughts. If Congress 

were able to put a plan in place, whether it is Bowles-Simpson or 

another approach, that provided that stimulus maybe for a period 

of time—in my judgment, pull back on the sequester—provided economic stability in terms of tax policy and revenue policy and started stabilizing things with a view toward trying to deal with the 

deficit over a period of time, what kind of signal would that send 

to the marketplace? And do you think that would be a positive signal? 

25 

Mr. BERNANKE. It would be very positive. It would reduce a lot 

of the uncertainty that we see. It would address a very important 

problem, and it would show the ability of our political system to deliver important results. 

You may recall that when the U.S. Government was downgraded 

last summer, the putative reason was the concern about the ability 

of Congress to come to a solution, not a lack of resources for the 

country as a whole, but it really was this issue about whether the 

Congress can work together to deliver a satisfactory outcome. 

So I think something like that, even if it was only an outline, you 

know, a set of guidelines or guideposts that Congress would fill in 

as it went forward, I think that would go a long way to reducing 

uncertainty, increasing confidence, and addressing one of our biggest longer-term problems. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman Bernanke, nice to see you. As you know, as a result 

of Dodd-Frank, the Federal Reserve has gained a great deal more 

authority to oversee U.S. banks. Regulators, we know, all of us 

agree bipartisanly, have a responsibility to ensure that firm rules 

are in place, that rules are being followed, that bad actors are 

being punished. Unfortunately, as we all know and read day after 

day after day, since 2008 we have seen too many examples of Wall 

Street again breaking rules and laws and common standards of 

ethical behavior. I follow up on some issues that Senator Vitter 

talked about, and I want to just run through it for the sake of repetition because it is so important to continue to recognize what 

these problems are: investor lawsuits; SEC enforcement actions 

over mortgage-backed securities; municipalities sold overpriced 

credit derivatives, bankrupting some of them; five of the Nation’s 

largest servicers found to have forged foreclosure documents and 

mortgage security legal documents. 

The Nation’s largest bank in January halted all consumer debt 

collection lawsuits over concerns about poorly maintained and inaccurate paperwork; the Nation’s largest bank has lost $5.8 billion to 

date on large, complex derivative trades the regulators either did 

not know about or looked the other way; it appears their employees 

misreported losses; 16 global banks are suspected of manipulating 

LIBOR that is used as a benchmark for mortgages and credit cards 

and student loans and, as you know, even derivatives. 

In June, one publication reported on a criminal bid-rigging trial 

exposing illegal practices by many Wall Street banks and arranging bids so that banks could underpay for municipal bonds. 

Two weeks ago, former employees of the Nation’s largest bank 

told the New York Times the company urged them to steer clients 

to their own mutual funds because they were more profitable for 

the bank even though they paid investors lower returns than other 

funds. 

The Federal Energy Regulatory Commission is investigating 

whether the biggest U.S. bank manipulated prices in the energy 

market. 

I mean, this goes on and on and on and on, not to mention 

wrongdoing in institutions over which the Fed has no jurisdiction: 

26 

MF Global, PFG Best, the problematic Facebook IPO, recent reports that analysts at Wall Street’s biggest banks are sharing secret information. 

No wonder the public does not trust you or us or any of the 

banks—whether the banks on Wall Street, the bank regulatory system. So I do not know any other answer, Mr. Chairman, other than 

to put out there and again say I think so many of our biggest 

banks are too big to manage and too big to regulate. I think this 

behavior shows they are too big to manage and too big to regulate. 

True? 

Mr. BERNANKE. There have been many bad practices, I agree. 

Many of them were tied to the crisis period, a period of excess. I 

think that is bad business. I think it is important for us to address 

those issues through enforcement. And, of course, part of the reason—I am not overclaiming here, but part of the reason you could 

make such a long list is that so many of these things have been 

turned up by various enforcement—— 

Senator BROWN. And perhaps many have not. 

Mr. BERNANKE. Perhaps many have not, that is true. On—— 

Senator BROWN. Well, Mr. Chairman—and I apologize for interrupting. It is not really fair. But you said this is bad business. 

Well, for a lot of them, it has been kind of good business. It has 

been a way for—it has been embarrassing to some, but it has also 

meant bigger and bigger profits and bigger and bigger bonuses. 

And to say it is bad business, from an academic viewpoint, from a 

perch at Princeton perhaps, but it is not good for our economy, but 

there have been far too many rewards for some of the bad actors. 

Mr. BERNANKE. It is very shortsighted. It is not the way you 

build a long-term relationship with customers and not the way you 

have long-term profits. 

On the size of banks, I think the real issue is too big to fail. If 

you conquer too big to fail, then there will be strong market pressures for banks that are too big to manage, too big to operate, to 

break up. There was a story about that in the media this morning 

about the benefits of providing shareholders with additional value 

by breaking up in situations where you do not have good controls 

and you do not have good synergies between different parts of the 

bank. 

And so what Dodd-Frank does is it provides a blueprint for attacking too big to fail, and that includes the liquidation authority, 

it includes the living wills—which, by the way, do provide a blueprint. If you wanted to break up banks or hive off parts of banks, 

the living wills provide some information about, you know, how you 

would do that in a sensible way. 

So I think it is very important to attack too big to fail, and we 

are addressing that through capital, through supervision, through 

orderly liquidation authorities, through living wills. And I think if 

banks are really exposed to the discipline of the market, we will 

see some breakups of banks. 

Senator BROWN. Living wills seem to take effect, at least in the 

nonfinancial world, only close to somebody’s deathbed, and I do not 

think these living wills address the issue, nor does this other regulation—other kinds of regulations seem to address the issues of all 

this litany of problems I mentioned. In the end, if these banks can 

27 

be regulated, then it seems clear to me that the Fed and other regulators—that includes the far too often captured by the regulators 

OCC—that they are either not up to the job, or they are complicit 

in Wall Street’s activities. I guess I beg of you to figure out how 

we are going to restore the confidence of the American people in 

the financial markets, because we certainly have not yet. 

Mr. BERNANKE. That is a high priority. I agree. 

Senator BROWN. Thank you. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman, and thank you, 

Chairman Bernanke, for being here. I just want to touch briefly on 

monetary policy before moving on to the LIBOR scandal. 

Mr. Chairman, you acknowledged that there is a range of views 

about the efficacy of the policy that you have been pursuing. I am 

sure you would also acknowledge that there is a range of views 

about the risks that are associated with the policies you have been 

pursuing. And I will acknowledge that I am sympathetic to the fact 

that we have given you a dual mandate, which I think intrinsically 

creates the risk that you will be put in a position where you have 

to deal with the conflict over two conflicting goals. 

But I just want to stress—and I know you and I disagree on this. 

We have had this conversation. But I just feel strongly that the 

problems facing our economy are not monetary in nature. They result from this ongoing deleveraging process that we are suffering 

through, a regulatory avalanche, completely unsustainable fiscal 

policy, which you have acknowledged, and the threat of huge tax 

increases. And so to address this with ever easier monetary policy, 

I worry very much about the unintended consequences, including 

the fact that it has the effect of masking the true cost of these deficits and making it easier for us to continue this very imprudent fiscal policy. 

So I just want to reiterate that point, but what I would like to 

ask you about, if I could, is this LIBOR scandal. And I will tell you 

I am very disturbed about this. I am disturbed about the destruction of what little confidence might remain in our financial system. 

I am very concerned about the direct impact to American citizens, 

including my constituents, among many. I think of the city of Bethlehem that engaged in interest rate swaps where they were paying 

a fixed rate, receiving floating rates based on LIBOR, and I wonder 

whether they were systematically receiving payments that were 

lower than what they should have gotten because of this. 

You had mentioned in your testimony or perhaps in answer to 

a question that Fed officials became aware of Barclays’ manipulating this index in April of 2008. The Wall Street Journal has an 

editorial today in which they recount an email exchange that occurred in August of 2007 between—or perhaps it was a phone conversation between a Barclays employee and a Fed official. 

I am just wondering. When did you become aware that there was 

some lack of integrity in the report of LIBOR rates? 

Mr. BERNANKE. So on your first point, let me just say that there 

is not as much disagreement as you imply. Monetary policy is not 

a panacea. It is not the ideal tool in many cases, and we look forward to having partnerships with other parts of economic policy. 

28 

On the telephone contacts, I would just note that these were 

phone calls, and these were calls made by junior employees whose 

job was to call and get so-called market color, get information 

about what was happening in the markets. And I think in one of 

those calls it was clear that the person calling the Fed employee— 

not an official, the Fed employee—did not know what LIBOR was 

or how it was constructed, and so there were some issues about 

how that was communicated. 

In any case, I learned about it, to my recollection, at the time 

when it became covered in the media, which would have been, I 

guess, in April 2008. 

Senator TOOMEY. OK. Here is what I do not understand. I know 

you fully appreciate the importance of this index, how widely used 

it is for all kinds of transactions and how the American financial 

system—I do not want to say it is dependent on it, but it is totally 

integrated into this. And you and many other regulators understood that there were serious questions about the integrity of this, 

perhaps even systemic problems with the integrity of this, and yet 

everybody allowed these transactions to continue. Did it not occur 

to somebody to bring the financial institutions together and say, 

hey, you probably ought to consider a different way of establishing 

your floating rate resets because there is this integrity problem? 

Did that conversation happen with any financial institutions or the 

public? 

Mr. BERNANKE. Well, financial institutions are not the only participants in this LIBOR-based market. 

Senator TOOMEY. OK. Yes, how about making it more broad? 

Mr. BERNANKE. So I think the best way to address the problem 

and given all the issues that were occurring during the crisis at 

that point in time, the best way to address the problem, at least 

in the near term, would be to reform the way those numbers were 

collected so that the LIBOR rate that was set would be, in fact, an 

accurate representation. 

Senator TOOMEY. I agree. My question, though—and you mentioned observable market transactions would seem like a better 

way of doing it than a survey of banks. That sounds sensible to me. 

The question is: Why have we allowed it to go on the old way when 

we knew it was flawed for the last 4 years, with trillions of dollars 

of transactions? 

Mr. BERNANKE. Because the Federal Reserve has no ability to 

change it. 

Senator TOOMEY. You have enormous influence over the institutions engaging in this. 

Mr. BERNANKE. We have been in communication with the British 

Bankers Association. They made some changes, but not as much as 

we would like. It is not that market participants do not understand 

how this thing is collected. It is a freely chosen rate. We were uncomfortable with it. We have talked to the Bank of England. 

Senator TOOMEY. But I am not sure that market participants 

were aware of the problem with the integrity of the mechanism by 

which it is established. And as you point out, there are other ways 

you could establish a perfectly viable floating rate that would not 

have these problems. I am just very surprised that this was alVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
29 

lowed to continue for so long when the problem with the integrity 

was known. 

Mr. BERNANKE. Well, again, Senator, the New York Fed took the 

lead in making, I think, some very good suggestions about how to 

clean up the LIBOR process. 

Senator TOOMEY. Thank you. 

Chairman JOHNSON. Senator Kohl. 

Senator KOHL. Chairman Bernanke, last July we discussed how 

the United States is experiencing a jobless recovery. You agreed 

then that the long-term unemployment was a major problem and 

recommended that Congress take a look at ways to help the unemployed through things like training and education. Of course, the 

Federal Reserve has its own mandate to keep unemployment low, 

and we continue to see very disappointing jobs numbers. 

I am sure we agree that the consequences of long-term unemployment are enormous. So why has the Fed been so slow to tackle 

unemployment? Over the past year, why hasn’t the Fed issued a 

third round of quantitative easing? And could you expand on your 

current maturity extension program? 

Mr. BERNANKE. Certainly. So first, just briefly, of course, we 

have taken a wide range of extraordinary actions to support the 

economy. In June, we took the step of continuing the maturity extension program, which has many of the features of quantitative 

easing in that it involves purchases of longer-term securities which 

provides financial accommodation and additional support to the 

economy. And we made clear that we were prepared to take further 

actions, and we are looking to see if we are going to get sustainable 

improvements in labor markets. If we are not getting sustainable 

improvements, we will have to seriously consider taking additional 

action. 

The reason that there is any question is really, again, the range 

of views about efficacy, costs, and risks associated with these nonconventional measures. But that being said, as we said in June, we 

are prepared to take further action, and we will evaluate our options as we go forward. 

Senator KOHL. I appreciate that. However, given that unemployment has remained over 8 percent for 41 months, a long enough 

time for it to be clear, now is the time to be more aggressive, I believe, in your approach to unemployment. And I think we agree the 

consequences of long-term unemployment are too great for this to 

go on very much longer. 

On LIBOR, Mr. Bernanke, one chief executive of a multinational 

bank was quoted in The Economist as saying that LIBOR is ‘‘the 

banking industry’s tobacco moment,’’ citing the 1998 federally negotiated settlement that cost American tobacco companies over $200 

billion. 

Can you foresee a scenario where banks would seek any type of 

taxpayer assistance in order to compensate parties that were victims of LIBOR rigging? Do you believe that potential court cases 

against banks that participated in LIBOR manipulation could indeed result in another federally negotiated settlement? 

Mr. BERNANKE. Well, there are many court cases already in 

progress. I think it is too soon to make any guess at what the outcome of those courts’ cases will be. There have been a few estiVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
30 

mates by private analysts of potential costs, but those are admittedly very much back-of-the-envelope types of calculations. So I 

think we have to let this play out. I do not know what the cost will 

be, and I really do not think is responsible for me to guess until 

we get more information about the impact of these actions on the 

actual LIBOR rate and the implications of that for rates that people paid. 

So it is obviously very serious, but I think it is too early to judge 

what the costs will be. 

Senator KOHL. Yes, and recent press reports indicate that the 

scandal could cost the banking industry millions, if not trillions of 

dollars. And as you know, there is no appetite here or anywhere 

else to do another bailout for the banks. Given the increasing 

amount of money that is at stake, I would urge you to work, when 

the time comes, closely with the Justice Department on this, and 

I think you would agree that you will. 

Mr. BERNANKE. If we can contribute to a global settlement, as we 

did in the case of the servicers, we would, of course. 

Senator KOHL. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. Chairman Bernanke, 

thank you for your testimony. 

In advance of the crisis, the financial crisis of 2008, at least to 

many observers of our country’s economy, it came out of the blue, 

came as a surprise. What is it that you are worried about now? 

What is out there now that we ought to be paying attention to that 

has the potential of being the next crisis to the economy of the 

United States? I often read about credit card debt. You read about 

student loan debt. What are the things that you are most worried 

about? And what are we doing to remediate the problem? 

Mr. BERNANKE. Well, I think the two items—and I mentioned 

these in my testimony—would first be the European sovereign and 

banking situation, which remains unresolved. There is still a lot of 

financial stress associated with that and I think still some distance 

before they get to a solution. That poses an ongoing drag on our 

economy, and although I have every hope and expectation that European leaders will find solutions, there is the risk of a more serious financial blowup. And we have been—I do not want to take all 

your time, but we have been taking appropriate steps here in the 

United States to try to strengthen our banks and provide—to prepare for whatever events might occur. 

The other, just briefly, is the domestic fiscal situation which we 

have been talking about, and I think it is important that in the 

short term Congress work effectively to address the debt limit and 

the fiscal cliff and those issues and in the medium term establish 

a strong, credible plan for fiscal sustainability. 

Senator MORAN. At what point in time do we have a sense of 

whether the European crisis is going to have huge consequences to 

the U.S. economy? What timeframe are we on in which we know 

whether Europe has appropriately responded to resolve their own 

problem? 

Mr. BERNANKE. Well, we appear to be in a muddling-through 

type of environment, which is costly to everybody, Europe even 

31 

more so than us. They are already in a recession, or at least many 

countries in Europe are already in recession. 

I think based on all I can observe, it seems like it could take a 

very long time because the structural and institutional changes 

that Europe is trying to make are not ones that take place quickly. 

For example, they have recently agreed in principle to create a single bank regulator for eurozone banks. To do that could well take— 

I do not have any inside information here, but obviously it could 

take some time—it could go into next year—before they have a single bank regulator. 

Likewise, they are trying to establish a set of fiscal rules and fiscal agreements, and they have made some progress there. But 

given that there are 17 Governments that have to agree to every 

major change, it could be some time before they come to a fully satisfactory fiscal arrangement. 

So it appears to be something that could go on for quite a while, 

unfortunately. 

Senator MORAN. Let me ask a more specific question, a more narrow question. The Kaufmann Foundation is a foundation in Kansas 

City that considers entrepreneurship, and its facts, it studies demonstrate that between 1980 and 2005, companies that are less than 

5 years old accounted for nearly all of the net new jobs created in 

the U.S. economy. In fact, new businesses create an average of 3 

million jobs each year. 

Unfortunately, our own Census Bureau now indicates that the 

startup engine is engine is slowing down. In 2010, there were 

about 394,000 new businesses started in the United States. This is 

the lowest level of new startups since 1977. 

I would like to hear your perspective on the importance of 

startups and what policies Congress and the administration should 

pursue to return to the days in which the United States is at the 

forefront of innovation and entrepreneurship. 

Mr. BERNANKE. Well, those facts I believe are correct. Young 

companies, so-called gazelles, are a big contributor to job creation 

because if they are successful, they grow quickly, and they add a 

lot of employees. I do not know the data you cited; I do not know 

how accurate they are. It is obviously very difficult to measure 

startups. Many of them are very small enterprises. But I think it 

is clear that both because of the weak economic conditions but also 

because of problems relating, for example, to the availability of 

credit and venture capital and the fact that many entrepreneurs 

use equity in their home as a form of startup capital, which is not 

as available now as it was before the crisis, it is very plausible that 

those companies are not starting up at the rate they have in the 

past. 

I do not have a really good program here to suggest other than 

to try to create as favorable a tax environment, as favorable a credit environment as possible for startup firms, to write regulations in 

a way that serves their purpose but allows small firms to flourish. 

According to international agencies who calculate these sorts of 

things, the U.S. has got a pretty small business friendly environment here in terms of the cost and time required to startup a small 

business. So it is not like we are in very bad shape on that. But 

any kind of improvement that would make it easier for small busiVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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nesses to get the necessary capital to meet the regulatory and other 

requirements and to avoid early tax burdens, all those things are 

obviously approaches that can help these companies startup and 

provide employment. 

Senator MORAN. Mr. Chairman, thank you. One would think that 

we would have significant startups, particularly in light of the unemployment numbers, which creates the opportunity or the necessity for someone to go startup a business on their own. 

Mr. BERNANKE. Sure. 

Senator MORAN. Mr. Chairman, thank you. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. And, Mr. Chairman, the end is near. Thank you for hanging in this morning. I 

would echo what my colleague Senator Moran just said. We actually have legislation to try to promote these startup activities, 

Startup Act 2.0, which addresses the very issues you talked about 

as well as the issue of talent. We are in a global competition for 

talent, and I commend Senator Moran’s leadership on this issue. 

We did make some movement on access to capital earlier. 

I know most of my colleagues have left, but I would also point 

out for some of my colleagues that because of the actions we took 

as this Congress in Dodd-Frank and otherwise, we have seen an increase in capital in American banks in excess of $300 billion, more 

in capital reserves, since the crisis, and clearly I think that has 

helped our banking industry relative to some of the banks that are 

under assault around the world. 

I also want to commend you for your continuing urging of us to 

act on fiscal policies. Waiting for Congress is a little bit like waiting for Godot. Hopefully we will see some actions later this year, 

and a number of us have been working on this. 

I guess one of the things I—my first question would be: As we 

grapple with this issue of trying to get an appropriate balance of 

revenues and entitlement reform to generate at least that $4 trillion, to drive our debt-to-GDP back down, and because, as you have 

pointed out, we can do this on a moderate—an intermediate basis 

and have the ability to phase these things in, I sometimes scratch 

my head, because what is being asked of the American people is 

so much smaller than what is being asked of the folks within the 

U.K. or folks within Europe or even folks in India and elsewhere 

where they are going through policy changes. Have you done any 

kind of sizing of what a $4 trillion deal relative to the size of our 

economy and the ask of the American people versus what is being 

asked of folks all around the rest of the world as they try to move 

forward and get their own fiscal houses in order? 

Mr. BERNANKE. Well, I have not done that exercise exactly, but 

in terms of percentage of GDP, you know, some of the fiscal shifts 

that are taking place in countries like Spain, Portugal, and Italy 

are very substantial and in the near term, which is part of the reason why their economies are so weak in the near term. So it is certainly true in terms of the fiscal step that is being taken that it 

is larger in these countries which are under fiscal stress. But I am 

not quite sure what the implication of that is. We are lucky that 

we can borrow at a very low interest rate. We are not currently in 

the same situation as a Greece or a Portugal. And, therefore, if we 

33 

can intelligently combine a gradual glide path with a strong, credible plan for stabilizing our deficits in the longer term, we can 

avoid that kind of painful contraction and do it more gradually. 

Senator WARNER. It almost seems to me that it is remarkable— 

and I think this is why Congress is at record low levels of approval—that we cannot step up, almost un-American that we cannot do our job relative to what is being asked of other people 

around the world. 

One of the things that—I know we have had some policy debate 

this morning on, additional actions you might take to stimulate the 

economy. I guess one question I would say for those who have questioned taking these actions, if we look at the European Central 

Bank’s recent actions in terms of—if we look at the Bank of England, if we look at the Chinese financial institutions, what effect 

of their stimulus activities or loosening activities does that have on 

the world economy and in terms of your decision making? 

Mr. BERNANKE. Well, there has been a global slowdown. A lot of 

it is emanating from Europe, which through export demand is affecting Asia and other parts of the world, the United States as 

well. There has been some slowing in Asia as well. The Chinese 

GDP statistics have been weaker this year than in previous years. 

Partly that was intentional as they sought to cool their housing 

market and address inflation concerns. 

But there is a slowing in the global economy. To the extent that 

actions taken by our trading partners strengthen those economies, 

it will help us on the margin because it will increase our markets 

and provide an overall better economic environment. 

But I would say at this point that compared to what we saw during the aftermath of the crisis, nothing is happening globally of 

that kind of scale. There are relatively modest steps being taken 

in both of those jurisdictions to try to offset some of the slowing. 

Senator WARNER. But those actions are similar to what you may 

take in the Fed, and I guess the point I would simply make is that 

there seems to be a consensus opinion around major economies 

around the world to take these type of stimulative actions. 

Mr. BERNANKE. The world is in an easing cycle. That is correct. 

And in terms of the specific actions, the U.K., for example, has 

been adding to its quantitative easing program and doing other 

things as well. So the U.S. is—it should be very clear the United 

States—the Federal Reserve is not the only central bank that has 

been using these unconventional policies as a tool for trying to 

strengthen their economies. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Wicker. 

Senator WICKER. Thank you very much. And, Chairman 

Bernanke, thank you so much for being here. I have been back in 

my office listening to most of this on television. 

I appreciate the fact that you have talked about fiscal policy as 

well as monetary policy and the overall economy. You note that 

your forecast is lower than it was back in January, and you say 

that you now forecast that we will have over 7 percent unemployment on through the end of 2014. I think we would all agree this 

is not the kind of economic growth that we need and that Americans have had in the past. 

34 

If taxes are raised on individuals making over $250,000, many of 

whom are small business people, many of whom are job creators, 

what effect will that have on the projection that you have in your 

written testimony? 

Mr. BERNANKE. Well, we have not done that specific exercise. I 

have been focusing on the overall size of the fiscal shock. That includes the expiration of all the 2001 and 2003 tax cuts as well as 

the end of the payroll tax cut, UI payments, and the sequestration. 

You put all those things together, and you get a shock which is 

about 4.5 percent of GDP. 

Senator WICKER. OK. Because the President came out and reiterated last week his request that we simply raise taxes on $250,000 

and above. I think you will agree that in terms of the Federal deficit, that is a relatively small amount. That would be a tax on job 

creators and would make your numbers worse, wouldn’t it? 

Mr. BERNANKE. It could, if it reduced incentives and if it reduced 

aggregate demand, both of those channels. But as often is the case 

in tax policy, you have got efficiency and growth concerns, and you 

have also got equity concerns, and all those things feed into tax decisions. 

Senator WICKER. I realize it is hard to predict with certainty, 

and I think we have seen that over time. But I would simply suggest to you that you are correct in saying that it could have an adverse effect. 

Let me ask you about the fiscal shock. I think we have got to do 

something on the spending side, and I know what you are saying. 

The economy is fragile, and you do not want it to happen quite so 

quickly. 

Senator Kyl and Senator McCain came up with a proposal to 

dealing with sequestration, and let me just ask you—it went over 

like a lead balloon, but let me go back to it and ask you what your 

general impression is of the proposal. It would have raised—it 

would have saved, rather, $127 billion in spending by simply doing 

two things: 

Number one, freezing Federal pay for Federal workers until June 

of 2014. That would be the first thing. 

The second thing would have been a 5-percent reduction in the 

Federal workforce—not a 5-percent reduction in Federal spending 

but a 5-percent reduction in the Federal workforce—by hiring only 

two workers to replace every three that are leaving through attrition. And this reduction would have taken up to 10 years to 

achieve. 

That is not the sort of thing that you view as a fiscal shock, is 

it? We could absorb that type of modest spending reduction in 

order to save us from the meat axe approach of sequestration at 

the end of this year. 

Mr. BERNANKE. Well, again, without endorsing the specific program, a spending program that comes in more gradually over a period of time but also is tied to a plan, a credible plan to achieve 

fiscal sustainability in the medium term is what I am recommending, is something that would avoid this very, very sharp 

change in the Government’s fiscal position, you know, on 1 day, on 

January 1, 2013. 

35 

Senator WICKER. Let me see if I can squeeze in one more thing. 

Unemployment rates, unacceptably high, and you have predicted 

now 7 percent of more by the end of 2014. 

In January of 2002, unemployment rate 5.7 percent; October of 

2003, unemployment rate 6 percent; by October of 2004 down to 5.5 

percent. Boy, wouldn’t we love to see that kind of unemployment 

right now in the United States of America. Down to 4.9 percent by 

August of 2005; 4.4 percent unemployment rate—these are actual 

figures—by October of 2006; as late as May of 2007, unemployment 

rate 4.4 percent; and then, of course, by the end of 2008, it is up 

to 7.3 percent. 

We hear a lot of discussion and a lot of warnings by people in 

this city about not going back to those disastrous policies that got 

us into the situation we are in in the first place. The fact is we had 

relatively low and a relatively acceptable unemployment rate for 

much of the decade until 2008, and we had real GDP growth in 

2006, 2007, and 2008. Isn’t that correct? 

Mr. BERNANKE. Until the end of 2008, yes. 

Senator WICKER. Now, what happened in 2008? Was it tax cuts 

for the rich? 

Mr. BERNANKE. No. We had a major financial crisis, as you know, 

and it created a global recession. 

Senator WICKER. Right. 

Mr. BERNANKE. A very deep one. 

Senator WICKER. Thank you very much. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair, and thank you, Chairman. In your opening comments, you mentioned the issue of housing refinancing and families that are underwater. We have about 

8 million families whose mortgages are underwater. Some can refinance through HARP, but it has been a pretty small number, only 

about 200,000 so far, in part because of the complexity with second 

mortgages. But if families who are underwater could refinance 

from those higher interest rates they are trapped in to lower interest rates, could that be a significant factor and a substantial tool, 

if you will, in helping to move the construction economy forward 

and stabilizing those 8 million families? 

Mr. BERNANKE. If that were possible, it would be helpful because 

it would both reduce payments and, therefore, reduce defaults and 

foreclosures, and it would improve the income of the people who 

could refinance. 

Senator MERKLEY. Thank you, Mr. Chairman. 

Let me switch to another comment I believe you made in response to Chairman Johnson, and I did not catch the exact words, 

but I think you said you had emails about fixing the interest rates 

to make the banks look more healthy, but we did not have emails 

related to collusion with derivative traders, or something like that. 

Could you help clarify what you said there? 

Mr. BERNANKE. Yes. There have been two somewhat different 

types of violations: one which was very much intense—that was 

most intense during the crisis was banks underreporting the cost 

of their borrowing in order to avoid looking weak in the market. 

That is the kind of information that people were talking about in 

the markets and that the New York Fed heard about in 2008. 

36 

The other kind of activity is the kind that the investigations have 

just recently revealed in the case of Barclays involved this very 

large fine where there was clear evidence of individual traders conspiring with others to manipulate the LIBOR submissions in order 

to improve or increase their profits from short-term derivatives 

trades. That is a different type—I am not making a judgment but 

just a different activity. And I was only making the point that it 

was only the former that came to the attention of the New York 

Fed. 

Senator MERKLEY. And so in terms of the latter, the collaboration 

between the traders and those who were reporting the LIBOR 

rates, when did that first come to the attention of the Fed? 

Mr. BERNANKE. Not until relatively recently. This was something 

that was discovered by the joint investigation of the CFTC, I think 

the SEC was involved, the DOJ, and the British authorities. 

Senator MERKLEY. Thank you. It was very stark to read some of 

these emails that were reported, such as, ‘‘Hi, Mate. We have an 

unbelievably large set on Monday. We need a really low 3-month 

fix. It could potentially cost a fortune.’’ Or another trader who 

wrote, ‘‘We need a 4.17 fix on the 1-month low fix. We need a’’— 

the print is a little small for me—‘‘4.41 fix on the 3-month high 

fix.’’ And certainly this type of activity, does this constitute fraud? 

Does this fall into a criminal area as well as just really unacceptable manipulation, if you will? 

Mr. BERNANKE. Based on what I know about it. What I have 

read about it, it does seem to be so, yes. 

Senator MERKLEY. I think the point that my colleague Senator 

DeMint was making earlier was when you know that someone has 

a thumb on the scale, isn’t there a responsibility to alert the customers about that thumb being on the scale? I know that you all 

did send this advice to the Bank of England or to others that there 

are ways to fix the thumb on the scale, get the thumb off the scale. 

But if you had it to do over again, would you also be alerting the 

customers, the municipalities that are making swaps, the folks who 

are getting mortgages based on LIBOR and so forth that something 

is not quite right here and you should be aware of our concerns? 

Mr. BERNANKE. Well, it is important that people know about it, 

but I am not sure I would agree that this was something that was 

unknown. The financial press was full of stories about it, and the 

reform proposals that the New York Fed made were also reported 

in the press. So I think that there was a good bit of knowledge, at 

least among more sophisticated investors, about this problem. 

Senator MERKLEY. I do think the municipalities that were involved are feeling that perhaps they were not as aware of the 

thumb on the scale as they might have been, but that will all be, 

I guess, sorted out in due course. 

Mr. BERNANKE. That is right. 

Senator MERKLEY. If my colleague will just bear with me for 30 

seconds, I just want to mention an issue I will follow up with you 

on, which is related to the growing role of banks in providing crude 

oil to refineries and then buying the products. We have Goldman 

that is doing this with a refinery operating in three States. 

JPMorgan is doing it with the largest east coast supplier. Morgan 

Stanley is now doing it in several States with PBF Energy. It reVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
37 

minds me a little bit of the situation when—and at this point there 

is no sign of wrongdoing of any kind, but it reminds me of the potential for problems that occurred when Enron was both supplying 

electricity and running electricity trading markets, because we 

have that here. We have now the banks involved as a supplier and 

purchaser of large quantities, but we also have them involved in 

all kinds of trading, in part because at this point regulators have 

exempted the spot markets, or at least the draft rules, from the 

Volcker firewall. 

Is this an issue that we should be concerned about, this substantial conflict of interest of being a supplier and also kind of, if you 

will, involved in the trading side? 

Mr. BERNANKE. Am I mistaken, Senator? I thought that the statute exempted the spot market as opposed to the regulation. 

Senator MERKLEY. Let us follow up on that. 

Mr. BERNANKE. Let us follow up on that. 

Senator MERKLEY. Let us follow up on that because there is also 

a lot of letters that have been submitted on the futures spot markets, if you will, not futures themselves. The ‘‘forward’’ I think is 

the right term. 

Mr. BERNANKE. Correct. 

Senator MERKLEY. And I believe that that is a gray area. 

Mr. BERNANKE. Well, except insofar as the statute exempts certain activities, I assume that proprietary trading in this area would 

be subject to the Volcker rule. 

Senator MERKLEY. The spot is not excluded in the statute. It 

does give regulators authority over that. 

Mr. BERNANKE. All right. We will look at that. 

Senator MERKLEY. OK. Thank you. 

Chairman JOHNSON. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman. Sorry. One would 

have thought I could have gotten the frog out of my throat 2 hours 

into this hearing. 

Mr. Chairman, thank you for being here, and thank you for your 

testimony. I want to make one observation, and then I have got a 

couple of questions, because there have been traces of a discussion 

in here today about the nature of the economic growth we need to 

see in this country, and it really is not just about GDP growth. It 

is about job growth and wage growth in the United States and 

whether we can recouple those things together. They decoupled in 

the last recovery. They are not coupled in this recovery. And as you 

observed, there are things that we can do in our Tax Code and our 

regulatory code and our statutes that actually would provide an 

ecosystem that would deliver on that promise again for the American people. 

We have been having a hard time getting to that conversation in 

this Congress, but we need to. That is the fundamental work, in 

my view, why we were sent here. 

We spend a lot of time talking about how to avert crisis now, and 

you are a historian of the Great Depression, I know, and I think 

100 years from now, if we do not get our act together here, no historian will be able to fairly record your tenure without saying that 

you came to the Senate and to the Congress and you very clearly 

said, ‘‘Here are the things I am most worried about, and if you do 

38 

not deal with it, you risk a real disaster.’’ One is Europe, which you 

talked a little bit about. I would like to hear on that score a little 

more about what you say in your testimony are the strong incentives to resolve the crisis that the Europeans have. The IMF, as 

you know, came out with a report yesterday about some of the 

challenges they face. 

Maybe I will start there. What are those strong incentives to resolve the crisis? They have a lot of political dysfunction there, as 

we do here, but they also have, as you pointed out, a less elegant 

institutional arrangement right now for dealing with it. 

Mr. BERNANKE. That is right. Well, they have both economic and 

political incentives. The European Union and all those Europeanwide institutions that include now the common currency area were 

created after World War II in part to try to avoid any future war 

on the European continent, and obviously that is an extremely important objective that people put a lot of weight on. And so closer 

political union is something that many European leaders consider 

to be important, and so this is part of—maintaining the currency 

and achieving stability there is part of that. 

In addition, both the North and the South, so to speak, benefit 

from the common currency. In particular, for example, the Germans have an exchange rate in the euro which is probably weaker 

than they would have if they had a deutsche mark, and, therefore, 

they have both a weaker currency, a more competitive currency, 

and, if you will, a captive market for selling their exports, both of 

which would not be there if the eurozone was not an integrated, 

stable structure. 

So even from the point of view of the Germans, who have, you 

know, the most concern about the potential fiscal costs of greater 

coordination within the eurozone, they have both very substantial 

political and economic reasons to try to make this happen, and 

throughout Europe, the general opinion polls in most cases are that 

people would still rather have the euro, despite all the problems 

that they have been facing. 

Now, as you point out, there are many difficult political problems. We have one Congress here, and we have difficulty coming 

to decisions. They have 17. 

Senator BENNET. I cannot even imagine. 

Mr. BERNANKE. They have 17 different parliaments, and they 

have a treaty which requires broad if not unanimous agreement. So 

there are some very substantial problems in getting to agreement. 

Senator BENNET. Let me, because I do not want the Senator from 

North Carolina to have to wait on me. Let me come to the second 

point, the stuff that is actually in our control. This is your testimony today, [Page 45]. ‘‘The most effective way that the Congress 

could help to support the economy right now would be to work to 

address the Nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of 

the recovery. Doing so earlier rather than later would help reduce 

uncertainty and boost household and business confidence.’’ 

Tell us what that 100-year history would record if we do not do 

this. 

Mr. BERNANKE. Well, in the short term—— 

Senator BENNET. And I mean short and medium and long. 

39 

Mr. BERNANKE. Well, as I was saying as the CBO and others 

have pointed out, if the fiscal cliff is allowed to happened, as is now 

programmed in the law, it would probably knock the recovery back 

into a recession and cost a lot of jobs and would greatly delay the 

recovery that we are hoping to facilitate. 

In the longer term, it is simply not possible for deficits to continue along the path that they are currently projected, so either 

some solution would have to be found that could be very, very painful at some point in the future because of the size of the cuts—we 

were talking about comparing us to Europe, and some of the countries that are making very, very deep cuts right now and how painful that is. Either we would have to have those kinds of cuts, or 

we might face a financial crisis where interest rates would rise, as 

we are seeing now in Europe, and that would feed through to other 

interest rates, like mortgages and other kinds of rates. And it 

would be very costly to our economy. 

So both in the short term and in the longer term, it is important 

for us as a Nation to create a fiscal policy that achieves both the 

short-term and long-term objectives. 

Senator BENNET. I wish I had more time, but I will come back 

to you with other questions. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman. And you, Chairman 

Bernanke, for enduring the long hearing today. I do want to say 

thank you, too, for your great work and your sacrifice. 

Mr. BERNANKE. Thank you. 

Senator HAGAN. We have talked a lot about LIBOR today. 

LIBOR, as I understand it, is simply a benchmark that lenders voluntarily use to represent the cost of borrowing by large banks. But 

there are alternative metrics. You mentioned in your testimony 

that financial institutions could use alternative benchmarks for 

loans and derivative contracts, such as commercial paper rates, the 

Fed funds rates, and the yield on U.S. Treasury. 

Can you discuss some of these alternatives? What might be a 

preferable benchmark? 

Mr. BERNANKE. Well, as you say, there have been a number of 

different ones. One that has been considered is the so-called general collateral repo rate. It is the rate at which repurchase agreements are done. It has the advantage of being a very thick market. 

A lot of trades take place, and trades take place at a number of 

different maturities, which is also important. So that would be a 

possibility that people are considering. 

Another possibility is the OIS rate, the so-called overnight index 

swap rate, which is a measure of expected central bank interest 

rates, essentially. It is like a measure of—a market-based measure 

of the longer-term Federal funds rate. And it has some advantages 

as well. 

I think the main thing that distinguishes these rates, the ones 

you mentioned, and the repo rate and others from LIBOR is, of 

course, that there are observable transactions every day, which 

means there is no ambiguity about what the rate is. And there 

would not be any of these issues raised by the LIBOR process that 

involve verifying whether the reported rates are indeed accurate. 

40 

Senator HAGAN. Could you see financial institutions voluntarily 

adopting an alternate to LIBOR. 

Mr. BERNANKE. I suspect that it will be seriously considered, unless, of course, measures are taken that restore confidence in 

LIBOR. The problem is that, of course, we have enormous amounts 

of existing contracts, not just derivatives contracts but a variety of 

other kinds of loans and securities, which are based on LIBOR. 

And until those negotiated away or they expire, we have this huge 

legacy issue of LIBOR-based financial contracts. So it might be— 

it is just like the QWERTY typewriter. You know, it is not very efficient, but everybody is used to it, so it is hard to change. You 

might have the same phenomenon there. But if we are going to 

keep LIBOR, it is important to make sure that it has the confidence of people in the markets. 

Senator HAGAN. Thank you. 

Chairman Bernanke, Section 941 of Dodd-Frank requires the 

Federal Reserve Board of Governors, along with other Federal 

agencies, to jointly prescribe regulations that require securitizers to 

retain credit risk. The proposed rule was issued in March of 2011, 

and the comment period was subsequently extended. 

Could you describe the role that the Federal Reserve Bank of 

New York and its staff are playing in the drafting and completion 

of that rule? 

Mr. BERNANKE. Well, we sometimes draw on reserve banks for 

specialized expertise. For example, in securitization laws, rules, we 

tried to look at existing arrangements for credit risk retention for 

different types of markets, and people in New York who deal with 

those markets on a regular basis would be helpful in providing that 

kind of information. 

But, of course, the responsibility for drawing up the regulations 

and making the final determination lies with the Board of Governors in Washington, and although we may use some expertise 

from New York, it is a Board decision. 

Senator HAGAN. Thank you. 

A last question. When discussing the nonstandard monetary policy tools that the FOMC is currently implementing, you have consistently said that the level of accommodation that the economy is 

receiving is based on the total stock of outstanding securities in 

your portfolio. In June, the FOMC announced that it was taking 

steps to extend the maturity of its Treasury portfolio rather than 

to expand its size or change its composition. 

Can you discuss why the FOMC would choose to extend the maturity of its Treasury portfolio and not acquire additional mortgagebacked securities which would have the added benefit of supporting 

the housing sector? 

Mr. BERNANKE. Well, when we say that the stock is what matters, we are referring to the stock of longer-term securities specifically. And so what this is doing is replacing very short-term securities with longer-term securities, increasing our stock of longer-term 

securities, putting downward pressure on longer-term interest 

rates, and by taking duration risk out of the market, pushing investors into related assets like corporate bonds and lowering the 

yields there as well. 

41 

So this was an effective step, and it was a relatively natural one 

since the previous program was just coming to an end in June, so 

we extended it for 6 months. But we continue to look at alternative 

approaches, including approaches that involve buying MBS, and 

trying to assess both the efficacy, costs, and risks of those programs as well as the outlook and the extent to which we think we 

can get a better outcome in the U.S. economy. 

Senator HAGAN. In the FOMC’s last policy statement, the Committee indicated that it was prepared to take additional steps if it 

did not see a continued improvement in the labor market. My question is: What would you describe as an improvement in the labor 

market if the FOMC does not project unemployment to fall much 

below the current levels before 2013? 

Mr. BERNANKE. Well, we would want to see unemployment going 

down. We do not want to see it stuck. 

Senator HAGAN. Right. We all do. 

Mr. BERNANKE. We do not want to see it going up. We want to 

see continued improvement. We had significant improvement between the fall of 2011 and earlier this year. Lately, we have been 

leveled out, and we would like to see the economy return to a situation where we are making progress on unemployment. 

Senator HAGAN. What I think about each and every day. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Chairman Bernanke, I want to thank you 

for your testimony today on the Fed’s economic forecast and its recent actions. Thank you. 

Mr. BERNANKE. Thank you. 

Chairman JOHNSON. This hearing is adjourned. 

[Whereupon, at 12:25 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

42 

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

Thank you Mr. Chairman. 

Today, we will hear Federal Reserve Chairman Bernanke testify on monetary policy and the state of the U.S. economy. 

Four years ago, President Obama campaigned on restoring economic growth and 

job creation. Today, both remain too weak to produce a meaningful recovery. 

At less than 2 percent, economic growth appears to be stuck at an anemic level. 

In June, only 80,000 jobs were added to employer payrolls, not enough to put a 

dent in the stubbornly high 8.2 percent unemployment rate. 

The Administration’s policy of more spending, more taxes, and more regulation 

has clearly impeded an economic recovery. 

Dodd-Frank rulemaking, of which 63 percent is behind schedule, has cast a dark 

cloud over the financial system, further chilling consumer and business lending and 

holding back growth. 

Housing recovery, too, has been hemmed in by the lack of a clear plan to resolve 

Fannie Mae and Freddie Mac and to reduce the Federal Government’s 99 percent 

share of the market. 

These policy failures are costly and compound the dangers already brought on by 

our mounting fiscal problems. 

Concerns of spillover from the European crisis remain front-and-center in the U.S. 

economy, but Europe also serves as a warning of what could happen if we do not 

change our own fiscal course. 

There is no doubt that we face challenging times for our economy and our prosperity as a Nation. 

In response to the dismal economic forecast, Chairman Bernanke has said that 

the Federal Reserve is ‘‘prepared to take further steps if necessary to promote sustainable growth and recovery in the labor market.’’ 

I hope that the Fed weighs carefully the medium- and long-term consequences of 

further action. 

Questions remain on the efficacy of additional so-called monetary stimulus, and 

many wonder what tools the Fed has left to use. 

The Federal funds rate has been at or near zero for almost 31⁄2 years. 

The Fed’s balance sheet stands at over $2.9 trillion, almost identical to its size 

a year ago when Chairman Bernanke delivered his last Humphrey-Hawkins testimony. This is more than three times its pre-crisis size. 

The Fed has conducted two rounds of balance sheet expansions called ‘‘Quantitative Easing’’ and a maturity extension program called ‘‘Operation Twist’’ that the 

Fed announced will continue through the end of the year. 

Even members of the Federal Open Market Committee (FOMC) have their doubts 

about this decision. Minutes from the June FOMC meeting indicate that several 

members thought the impact of another round of Operation Twist ‘‘was likely to be 

modest.’’ 

One may wonder if the downside risks outweigh the limited upside benefit of continuing the program. 

Some FOMC members even noted that it ‘‘could lead to deterioration in the functioning of the Treasury securities market.’’ 

Considering the risks presented by the Fed’s more unconventional programs and 

the need to unwind the Fed’s balance sheet without causing major economic disruption, some have questioned the prudence of undertaking a new program to provide 

monetary easing, especially when there appears to be no clear exit strategy. 

During last year’s Humphrey-Hawkins hearing, I expressed concerns over the lack 

of transparency of balance sheet operations. 

The Fed has yet to disclose a plan on how it would reduce its balance sheet holdings, which must be carefully done to avoid dire outcomes like sparking inflation 

and eroding the dollar’s value. 

Because so much is at stake for the U.S. economy, the Fed as a public entity has 

the responsibility to make as much information available as possible on its actions 

and the risks they entail. 

Some authorities think there is cause for concern. In its annual report, the Bank 

of International Settlements laid out the risks entailed with the worldwide expansion of central bank balance sheets and their extended low interest rate policies. 

Not only did the report conclude that such actions create ‘‘longer-term risks to 

[central banks’] credibility and operational independence,’’ but they ‘‘may delay the 

return to a self-sustaining recovery.’’ 

I hope that Chairman Bernanke will reassure our financial markets during his 

testimony of the Fed’s credibility and independence, that the actions the Fed takes 

will not hurt economic recovery. 

43 

Recent events have already shaken confidence in our financial system. 

In particular, the issue that bankers manipulated the London Interbank Offered 

Rate (LIBOR) is one that must be fully examined by this Committee. 

LIBOR is an important interest rate benchmark. It affects nearly every interest 

rate calculation for consumers, businesses, and banks around the world. 

While only one bank has admitted its involvement in the manipulation of LIBOR 

so far, it has been widely reported that the U.S. Department of Justice and regulators are building cases against other banks involved in the LIBOR-fixing process. 

The American people deserve answers to important questions about the LIBOR 

manipulation. 

For example, to what extent were consumers, business, and municipalities 

harmed by the manipulation of LIBOR? 

Which financial institutions were involved? 

When did U.S. regulators, including the Fed, first learn about the manipulation? 

What steps did the Fed take to restore integrity to the LIBOR market? 

Could the Fed or other regulators have done more to prevent it? 

I hope that Chairman Bernanke can provide answers to these critical questions 

in his testimony before us today. Thank you Mr. Chairman. 

PREPARED STATEMENT OF BEN S. BERNANKE 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JULY 17, 2012 

Chairman Johnson, Ranking Member Shelby, and other Members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy 

Report to the Congress. I will begin with a discussion of current economic conditions 

and the outlook before turning to monetary policy. 

The Economic Outlook 

The U.S. economy has continued to recover, but economic activity appears to have 

decelerated somewhat during the first half of this year. After rising at an annual 

rate of 21⁄2 percent in the second half of 2011, real gross domestic product (GDP) 

increased at a 2 percent pace in the first quarter of 2012, and available indicators 

point to a still-smaller gain in the second quarter. 

Conditions in the labor market improved during the latter part of 2011 and early 

this year, with the unemployment rate falling about a percentage point over that 

period. However, after running at nearly 200,000 per month during the fourth and 

first quarters, the average increase in payroll employment shrank to 75,000 per 

month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of 

this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent. 

Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices 

are now providing some support to consumers’ purchasing power, households remain 

concerned about their employment and income prospects and their overall level of 

confidence remains relatively low. 

We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually 

trending upward since last summer, and some measures of house prices have turned 

up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. 

On the demand side, many would-be buyers are deterred by worries about their own 

finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or 

because their current mortgages are underwater—that is, they owe more than their 

homes are worth. On the supply side, the large number of vacant homes, boosted 

by the ongoing inflow of foreclosed properties, continues to divert demand from new 

construction. 

After posting strong gains over the second half of 2011 and into the first quarter 

of 2012, manufacturing production has slowed in recent months. Similarly, the rise 

in real business spending on equipment and software appears to have decelerated 

from the double-digit pace seen over the second half of 2011 to a more moderate 

rate of growth over the first part of this year. Forward-looking indicators of investment demand—such as surveys of business conditions and capital spending plans— 

suggest further weakness ahead. In part, slowing growth in production and capital 

investment appears to reflect economic stresses in Europe, which, together with 

44 

1See, table 1, ‘‘Economic Projections of Federal Reserve Board Members and Federal Reserve 

Bank Presidents, June 2012’’, of the Summary of Economic Projections, available at the Board 

of Governors of the Federal Reserve System (2012), ‘‘Federal Reserve Board and Federal Open 

Market Committee Release Economic Projections from the June 19–20 FOMC Meeting’’, press 

release, June 20, www.federalreserve.gov/newsevents/press/monetary/20120620b.htm; table 1 is 

also available in Part 4 of the July ‘‘Monetary Policy Report to the Congress’’. 2 Ben S. Bernanke (2012), ‘‘Semiannual Monetary Policy Report to the Congress’’, statement 

before the Committee on Financial Services, U.S. House of Representatives, February 29, 

www.federalreserve.gov/newsevents/testimony/bernanke20120229a.htm. 

some cooling in the economies of other trading partners, is restraining the demand 

for U.S. exports. 

At the time of the June meeting of the Federal Open Market Committee (FOMC), 

my colleagues and I projected that, under the assumption of appropriate monetary 

policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real 

GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this 

year and 2.2 to 2.8 percent for 2013. 1 These forecasts are lower than those we made 

in January, reflecting the generally disappointing tone of the recent incoming data. 2

In addition, financial strains associated with the crisis in Europe have increased 

since earlier in the year, which—as I already noted—are weighing on both global 

and domestic economic activity. The recovery in the United States continues to be 

held back by a number of other headwinds, including still-tight borrowing conditions 

for some businesses and households, and—as I will discuss in more detail shortly— 

the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the 

housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should 

fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth 

is projected to be not much above the rate needed to absorb new entrants to the 

labor force, the reduction in the unemployment rate seems likely to be frustratingly 

slow. Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014. 

The Committee made comparatively small changes in June to its projections for 

inflation. Over the first 3 months of 2012, the price index for personal consumption 

expenditures (PCE) rose about 31⁄2 percent at an annual rate, boosted by a large 

increase in retail energy prices that in turn reflected the higher cost of crude oil. 

However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 11⁄2 percent over 

the first 5 months of this year, compared with a 21⁄2 percent rise over 2011 as a 

whole. The central tendency of the Committee’s projections is that inflation will be 

1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee 

judges to be consistent with its statutory mandate in 2013 and 2014. 

Risks to the Outlook 

Participants at the June FOMC meeting indicated that they see a higher degree 

of uncertainty about their forecasts than normal and that the risks to economic 

growth have increased. I would like to highlight two main sources of risk: The first 

is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation. 

Earlier this year, financial strains in the euro area moderated in response to a 

number of constructive steps by the European authorities, including the provision 

of 3-year bank financing by the European Central Bank. However, tensions in euroarea financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions 

about Spain’s fiscal position and the resilience of the euro-area banking system 

more broadly. Euro-area authorities have responded by announcing a number of 

measures, including funding for the recapitalization of Spain’s troubled banks, 

greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to 

sovereigns), and movement toward unified supervision of euro-area banks. Even 

with these announcements, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility 

that the situation in Europe will worsen further remains a significant risk to the 

outlook. 

The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities 

have both strong incentives and sufficient resources to resolve the crisis. At the 

same time, we have been focusing on improving the resilience of our financial sysVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
45 

3 Congressional Budget Office (2012), ‘‘Economic Effects of Reducing the Fiscal Restraint 

That Is Scheduled To Occur in 2013’’ (Washington: CBO, May), available at www.cbo.gov/publication/43262. The effect of the fiscal cliff on real GDP is shown in table 2 (p.6). The effect of 

the fiscal cliff on employment, relative to a less restrictive alternative fiscal scenario that assumes that most expiring tax provisions are extended and that the spending sequestration does 

not take effect, is shown in table 3 (p.7). 

tem to severe shocks, including those that might emanate from Europe. The capital 

and liquidity positions of U.S. banking institutions have improved substantially in 

recent years, and we have been working with U.S. financial firms to ensure they 

are taking steps to manage the risks associated with their exposures to Europe. 

That said, European developments that resulted in a significant disruption in global 

financial markets would inevitably pose significant challenges for our financial system and our economy. 

The second important risk to our recovery, as I mentioned, is the domestic fiscal 

situation. As is well known, U.S. fiscal policies are on an unsustainable path, and 

the development of a credible medium-term plan for controlling deficits should be 

a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax 

increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full 

range of tax increases and spending cuts were allowed to take effect—a scenario 

widely referred to as the fiscal cliff—a shallow recession would occur early next year 

and about 11⁄4 million fewer jobs would be created in 2013. 3 These estimates do not 

incorporate the additional negative effects likely to result from public uncertainty 

about how these matters will be resolved. As you recall, market volatility spiked and 

confidence fell last summer, in part as a result of the protracted debate about the 

necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling 

and other difficult fiscal issues come into clearer view toward the end of this year. 

The most effective way that the Congress could help to support the economy right 

now would be to work to address the Nation’s fiscal challenges in a way that takes 

into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost 

household and business confidence. 

Monetary Policy 

In view of the weaker economic outlook, subdued projected path for inflation, and 

significant downside risks to economic growth, the FOMC decided to ease monetary 

policy at its June meeting by continuing its maturity extension program (or MEP) 

through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. 

As a result, it decreases the supply of longer-term Treasury securities available to 

the public, putting upward pressure on the prices of those securities and downward 

pressure on their yields, without affecting the overall size of the Federal Reserve’s 

balance sheet. By removing additional longer-term Treasury securities from the 

market, the Fed’s asset purchases also induce private investors to acquire other 

longer-term assets, such as corporate bonds and mortgage backed-securities, helping 

to raise their prices and lower their yields and thereby making broader financial 

conditions more accommodative. 

Economic growth is also being supported by the exceptionally low level of the target range for the Federal funds rate of 0 to 1⁄4 percent and the Committee’s forward 

guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, 

noting that it expects that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the Federal funds rate at least through late 2014. 

The Committee has maintained this conditional forward guidance at its subsequent 

meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear 

at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. 

Thank you. I would be pleased to take your questions. 

46 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM BEN S. BERNANKE 

Q.1. At the hearing you mentioned potential alternatives to 

LIBOR. What next steps should be taken to either reform or replace LIBOR as a benchmark for the interest rates on financial 

products? What should the Fed’s role be in any international process to reform or replace it? 

A.1. Answer not received by time of publication. 

Q.2. Critics of Wall Street Reform claim that the law is holding 

back the economic recovery. What has had a greater impact on 

high unemployment today—the Wall Street Reform Act or the ineffective regulations that led to the financial crisis? Can you offer examples of how the financial system is now safer as a result of policies that the Fed has implemented pursuant to the Wall Street Reform Act? 

A.2. The recent financial crisis demonstrated that some financial 

companies had grown so large, leveraged, and interconnected, that 

their failure could pose a threat to overall financial stability. The 

crisis also exposed significant weaknesses in banking organizations’ 

internal management and stress testing practices, as well as deficiencies in the regulators’ toolkit to address them. In addition, the 

amount of high-quality capital held by banking organizations globally was insufficient to absorb losses that banking organizations experienced during that period. Insufficient liquidity and associated 

risk management practices also directly contributed to the failure 

or near failure of many companies and exacerbated the crisis. To 

address these and other weaknesses, the Federal Reserve has 

taken various steps to improve the regulation and supervision of 

individual firms to enhance their resiliency in times of stress, as 

well as the resiliency of the financial system as a whole. These 

measures have been taken pursuant to the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act), as well as 

the Federal Reserve’s authority as the supervisor of various financial institutions. 

For example, in January 2012, the Board published for comment 

proposed rules that would implement the enhanced prudential 

standards and early remediation requirements of sections 165 and 

166 of the Dodd-Frank Act. The proposal generally applies to all 

U.S. bank holding companies with total consolidated assets of $50 

billion or more and nonbank financial companies that the Financial 

Stability Oversight Council has designated for supervision by the 

Board (covered companies). The proposal addresses issues such as 

capital, liquidity, single counterparty credit limits, stress testing, 

risk management, and early remediation requirements. The Board 

intends to supplement the enhanced risk-based capital and leverage requirements proposed in January 2012 with a subsequent proposal to implement a quantitative risk-based capital surcharge for 

covered companies or a subset of covered companies. To further implement the provisions of sections 165 and 166 of the Dodd-Frank 

Act, the Board issued proposed rules in December 2012 to strengthen the oversight of the U.S. operations of large foreign banking organizations, including measures regarding early remediation, capital stress testing, overall risk management, and enhanced riskVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
47 

based and leverage requirements for these organizations. These 

proposals are aimed at strengthening the regulatory framework to 

address the risks that large, interconnected financial institutions 

pose to U.S. financial stability. 

In addition, in June 2012, the Board and the other Federal banking agencies issued three notices of proposed rulemaking that 

would effectively result in increasing the quantity and quality of 

capital held by banking organizations. The proposed rules would 

introduce a new common equity tier 1 capital requirement, raise 

existing minimum tier 1 capital requirements, and implement a 

capital conservation buffer to increase the resiliency of all banking 

organizations during times of economic and financial stress. The 

proposed rules would also be incorporated into the enhanced standards for covered companies discussed above. These measures are 

designed to help address the shortcomings in the international capital standards exposed during the crisis and build additional capacity into the banking system to absorb losses in times of future market and economic stress. The proposals also would enhance the 

risk-sensitivity of the agencies’ capital requirements by revising the 

calculation of risk-weighted assets for certain exposures to address 

weaknesses identified in the capital framework in recent years. 

The Federal Reserve has also been working to embed its supervisory practices within a broader macroprudential framework that 

focuses not only on the conditions of individual firms but also on 

the health of the financial system as a whole. Even before the enactment of the Dodd-Frank Act, the Federal Reserve had begun to 

overhaul its approach to supervision to better achieve both microprudential and macroprudential goals. For example, in 2009, the 

Federal Reserve created the Large Institution Supervision Coordinating Committee, which oversees the supervision of the most systemically important financial firms. Another important example of 

the Federal Reserve’s strengthened, cross-firm supervisory approach is the Comprehensive Capital Analysis and Review, through 

which the Federal Reserve assesses the internal capital planning 

processes of the largest bank holding companies and evaluates 

their capital adequacy under a very severe hypothetical stress scenario. Largely as a result of these efforts and the Federal Reserve’s 

action during the crisis, the aggregate amount of tier 1 common for 

the 19 largest bank holding companies increased by more than 

$300 billion between 2009 and 2012. The Federal Reserve also routinely uses macroprudential tools in analyzing the potential consequences of significant economic events for the individual firms it 

supervises and for the financial system as a whole. 

The proposed enhanced prudential standards and regulatory capital requirements, as well as other additional steps that the Federal Reserve has taken in response to the crisis and pursuant to 

the Dodd-Frank Act, are designed to strengthen the banking system and the financial system as a whole by strengthening regulatory requirements and the supervision of the most systemically 

important financial firms. 

Q.3. Do you think that the policy changes announced at the recent 

EU summit go far enough toward solving the European financial 

crisis? How will U.S. banks be affected by the proposed eurozone 

banking union? 

48 

A.3. At their late June summit, European leaders agreed on a 

number of measures to address the financial crisis. These included, 

among other steps, establishing a single supervisory mechanism for 

European banks and, once such a mechanism is in place, enabling 

the European Stability Mechanism (ESM), the permanent euroarea backstop facility, to recapitalize banks directly. Subsequently, 

European leaders have also made progress in enhancing regional 

policy support for vulnerable euro-area countries. The European 

Central Bank (ECB) has announced a program that would enable 

it to purchase sovereign debt in order to address market distortions 

and contain bond yields. Countries benefiting from ECB support 

will have to enter into assistance programs and commit to achieving appropriate conditions prior to ECB assistance. 

These developments have helped ease stresses in European financial markets and hold out the hope of further progress toward 

resolution of the crisis. However, European leaders must follow 

through on their commitments by agreeing to specific, detailed 

plans and then implementing them. Market participants have reacted favorably to announcements of the ECB’s new bond purchase 

framework, but more work must be done to operationalize this 

strategy. By the same token, further agreements among European 

authorities will be required before the single supervisory mechanism for banks can be put in place. Additionally, if a full resolution 

of Europe’s difficulties is to be achieved, these regional initiatives 

must be complemented by further actions in the vulnerable countries themselves to improve public finances, strengthen banking 

systems, and promote pro-growth structural reforms. 

Euro-area banks currently are supervised by 17 national supervisors. Establishing a single supervisory mechanism should help to 

streamline supervisory compliance costs, further the integration of 

the European financial market and make it easier for international 

banks, including U.S. banks, to conduct business within and across 

euro-area countries. Moreover, tougher and more consistent bank 

supervision in Europe should reduce the frequency and severity of 

financial distress of European banks and hence contribute to global 

financial stability. 

Q.4. What are the barriers preventing homeowners who are current on their mortgage payments from refinancing? Could legislation address those barriers, and how would such legislation help 

with economic recovery? 

A.4. Low credit scores or levels of home equity make it difficult for 

many borrowers to refinance their mortgages. Initiatives such as 

the Home Affordable Refinance Program (HARP) and the streamlined refinance program offered by the Federal Housing Administration (FHA) have reduced or eliminated these barriers for many 

borrowers with loans guaranteed or insured by Fannie Mae, 

Freddie Mac, or FHA. However, borrowers whose loans are held in 

bank portfolios or private-label mortgage-backed securities, as well 

as borrowers who have already refinanced through HARP, often 

face significant obstacles to refinancing if their credit scores or 

home equity fall below certain levels. The Monetary Policy Report 

submitted to the Congress on July 17, 2012, and the staff housing 

49 

paper sent to the Committee on Banking, Housing, and Urban Affairs on January 4, 2012, provide further discussion of these issues. 

The Congress could facilitate refinancing for these borrowers by 

legislating changes to HARP or the FHA refinancing program or by 

creating a new refinancing program. In designing such legislation, 

the Congress would have to consider how to balance the interests 

of borrowers, taxpayers, and investors. A refinancing program 

might provide a small boost to aggregate consumer spending, decrease the incidence of mortgage default, and improve consumer 

confidence, but the size of such effects is difficult to predict. 

Q.5. The Fed is proposing a set of rules implementing Sections 165 

and 171 of the Wall Street Reform Act and the Basel III agreements. These rules would apply to insurance companies organized 

as thrift holding companies or designated as nonbank financial 

SIFIs. Did the Fed consult with the Federal Insurance Office 

(FIO)? Do you anticipate that you will consult regularly with FIO 

as you engage in rulemakings that impact insurance companies? 

What else is the Fed doing to develop its insurance expertise? As 

part of these rulemakings, what steps did the Fed take to analyze 

the differences between banks and insurance companies and to incorporate those findings into the rulemakings? Do you think that 

the recent actions and rulemakings of the Fed appropriately recognize the differences between insurance companies and banks? 

A.5. Board staff has consulted with the Federal Insurance Office on 

issues related to capital requirements, stress testing, and insurance 

matters generally. Board staff also met with industry representatives and with the National Association of Insurance Commissioners on several occasions to discuss insurance-related issues. 

The Board also sought public comment on capital and accounting 

issues as well as on regulatory and supervisory requirements for 

savings and loan holding companies when it published a notice of 

intent regarding these institutions on April 22, 2011. The Board expects to continue this practice of consultations with other regulators and standard-setters, as well as the industry and the public, 

to further the Board’s expertise and to gain additional perspectives 

on the regulation and supervision of insurance companies as appropriate. 

In June 2012, the Board and the other Federal banking agencies 

proposed to revise risk-based and leverage capital requirements in 

three notices of proposed rulemaking. In proposing the regulatory 

capital requirements, the Board sought to meet several legal requirements and policy goals. Section 171 of the Dodd-Frank Act, requires that the Board establish minimum consolidated risk-based 

and leverage capital requirements for savings and loan holding 

companies that are not less than the ‘‘generally applicable’’ riskbased and leverage capital requirements for insured depository institutions. Accordingly, the proposals include consistent treatment 

for similar types of exposures, whether held at a depository institution or a savings and loan holding company, as well as provide 

flexibility for certain insurance-related assets that generally are 

not held by depository institutions. For example, the proposals include specific risk-weights for policy loans and nonguaranteed sepaVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
50 

1 77 FR 53060. 

2See, for example, SR 09-04, ‘‘Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies’’; 

see also June 2012 proposed regulatory capital rule, 77 FR 52792). 

rate accounts, which are typically held by insurance companies but 

not depository institutions. 

The Board has received numerous comments from the public on 

the proposals with regard to the application of the proposed rules 

to insurance-centric savings and loan holding companies. The 

Board will carefully consider all the comments received while finalizing the regulatory capital rules. 

Q.6. The recent losses at JPMorgan have renewed focus on risk 

management practices. Additionally, JPMorgan has stated that the 

firm changed its risk models and trading positions in anticipation 

of new capital requirements under Basel III. Please provide your 

comments on how new capital requirements will strengthen the financial system, as well as any potential risks that may arise from 

these new capital standards. If the new standards encourage institutions to shift their activities into other risky activities, or have 

other unintended consequences, please comment on how you plan 

to address those shifts. In your answer, please also include any expectations you may have regarding institutional risk management 

and the Fed’s supervision of risk management at institutions. 

A.6. In June 2012, in addition to issuing the proposed rules described in the answer to Question 2 above, the Federal banking 

agencies approved a final rule to implement changes to the market 

risk capital rule that applies to banking organizations with significant trading activity. 1 The changes are primarily designed to ensure appropriate capital is held against trading positions, reduce 

the procyclicality of the capital requirements, and enhance the 

measure of credit risk of traded positions. Thus, the rule is expected to help ensure that banking organizations maintain stronger 

capital positions and improve the resilience of the U.S. banking 

system in times of stress, thus contributing to the overall health 

of the U.S. economy. 

There are risks that banking organizations may alter their practices and engage in different activities as a result of new and proposed capital rules. However, the Federal Reserve has a comprehensive supervisory framework and regulations beyond the regulatory capital rules to help address these risks. For example, a supervisory assessment of banking organizations’ capital adequacy 

takes into account a banking organization’s internal processes for 

capital adequacy, as well as risks and other factors that can affect 

the banking organization’s financial condition, including the level 

and severity of problem assets and the organization’s exposure to 

operational and interest rate risk. 2 For internationally active institutions, the supervisory review process for capital adequacy (the socalled Pillar 2 approach based on the international Basel II standards) is even more rigorous and comprehensive as it emphasizes 

the need for these institutions to look beyond the regulatory capital 

standards and to help institution’s ensure that they maintain adequate capital levels in relation to their risk profiles. Further, for 

the largest U.S. bank holding companies, the Federal Reserve has 

51 

established regulatory requirements for regular stress testing and 

capital planning and conducts supervisory assessments of the capital planning processes and capital adequacy of these firms. 

The Federal Reserve has also put forth other guidance for banking organizations related to risk management in Supervision and 

Regulation Letters. For example, the Federal banking agencies finalized stress testing guidance in May 2012 for banking organizations with total consolidated assets of more than $10 billion that 

focuses on the importance of banking organizations conducting forward-looking assessments of their risks to better equip them to address a range of adverse outcomes. The supervisory guidance on 

model risk management, issued in April 2011, describes key aspects of the effective model risk management, as well as key principles of sound governance and internal controls governing the use 

of models. These and other supervisory guidance and regulations 

are designed to improve banking organizations’ risk management 

practices, as well as the supervisory toolkit to enforce robust procedures and sound risk management so that banking organizations 

manage their risks effectively and hold adequate capital commensurate with their risk profiles. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM BEN S. BERNANKE 

Q.1. It is my understanding that the Federal Reserve supervises 

Citigroup, JPMorgan Chase, Bank of America Corp, and the U.S. 

branches of foreign banks. As these institutions face potentially billions of dollars in fines, legal costs, and settlements due to their involvement in the LIBOR setting process, why did the Federal Reserve not consider this to be a safety and soundness concern? 

A.1. Answer not received by time of publication. 

Q.2. How does the Federal Reserve define an unsafe or unsound 

practice? What authority does the Federal Reserve have to end an 

unsafe and unsound practice in institutions it supervises? 

A.2. Answer not received by time of publication. 

Q.3. Do you have ‘‘cease and desist’’ authority which could, for example, be used to stop traders and employees responsible for determining LIBOR submissions at supervised institutions from manipulating and falsely reporting LIBOR? If so, why did the Federal Reserve decide not to use it? 

A.3. Answer not received by time of publication. 

Q.4. Does the Federal Reserve have authority to require supervised 

institutions to adopt better internal controls to prevent traders and 

others from making unlawful requests to employees responsible for 

determining LIBOR? If so, why did you decide not to use this authority? 

A.4. Answer not received by time of publication. 

Q.5. Did analysts with the New York Federal Markets Group analysts engage with Federal Reserve supervisory staff overseeing 

Citigroup, JPMorgan Chase, or Bank of America regarding potential issues with the accuracy of LIBOR reporting? If so, on what 

52 

dates did these interactions happen and what was the general substance of those conversations. If not, why not? 

A.5. Answer not received by time of publication. 

Q.6. Were the April 2008 briefing notes and the May 20, 2008, report prepared by the Federal Markets Group regarding the accuracy of LIBOR reporting circulated to the staff responsible for supervising these institutions at the New York Fed or the Federal 

Reserve? Why or why not? 

A.6. Answer not received by time of publication. 

Q.7. Were appropriate internal controls in place at the Federal Reserve to make sure that appropriate and timely actions were taken 

regarding potential LIBOR fraud? Are you reviewing the conduct 

and behavior of your analysts and supervisory staff with responsibility for overseeing institutions involved in the LIBOR setting 

process? If not, why not? If so, what changes and remedial actions 

have you taken? 

A.7. Answer not received by time of publication. 

Q.8. Regardless of the fact that direct supervision for the setting 

of LIBOR was under the purview of U.K. regulators, the Federal 

Reserve had supervisory responsibility for three of the institutions 

involved in setting the rate. Was it the policy of the Federal Reserve to defer to foreign regulators even though there was evidence 

that institutions supervised by the Fed were involved in potential 

manipulation of LIBOR? 

A.8. Answer not received by time of publication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM BEN S. BERNANKE 

Q.1. The Bank Supervision Groups of the 12 Federal Reserve 

Banks include approximately 3,600 staff, and they are scattered 

across the country. The banking and financial industries, however, 

are concentrated in New York where 7 of the 10 largest bank holding companies are located. Why are the examination resources of 

the Federal Reserve System still split up evenly over the 12 regional banks? Should the resources be dispersed in a more proportional manner to the location and size of regulated entities? 

A.1. The Federal Reserve supervises state-chartered banks that 

have chosen to become members of the Federal Reserve System 

(state member banks); bank holding companies and savings and 

loan holding companies and any nonbanking subsidiary of such 

companies that is not functionally regulated by another federal or 

state regulator; foreign branches of member banks; Edge Act and 

agreement corporations; U.S. State-licensed branches, agencies, 

and representative offices of foreign banks; and the U.S. nonbanking activities of foreign banks. Supervisory resources and expertise are dispersed across the Federal Reserve System as needed 

to effectively supervise these institutions based on their number, 

size, complexity, and activities. The Federal Reserve Bank of New 

York has the largest number of supervision staff. More than half 

of all the Reserve Bank supervision staff is located in the New 

York, Chicago, Richmond, and Atlanta districts. Where cost and suVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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pervisory efficiencies can be gained by consolidating or sharing expertise, the Federal Reserve has developed a program for sharing 

subject matter experts and other staff among the Reserve Banks. 

Q.2. In 2005, a peer group of other Federal Reserve Banks found 

that the supervision team at the New York Fed appeared to have 

‘‘insufficient resources to conduct continuous supervisory activities 

in a consistent manner’’ for certain institutions. In 2009, another 

peer group study concluded that ‘‘there have been significant weaknesses in the execution of the supervisory program’’ at the New 

York Fed. When the Financial Crisis Inquiry Commission (FCIC) 

made these criticisms public, the New York Fed responded by increasing the resources applied. 

Can you give additional detail on how examiners and other supervisory resources have been increased or reallocated since 2005? 

How many examiners out of 3,600 supervision staff are embedded 

at each of the 10 largest banks? Are published reports accurate 

that say about 200 examiners total are embedded at the 5 largest 

Wall Street banks? 

A.2. Since 2005, and especially since the financial crisis, the Federal Reserve has sharpened its supervisory focus by increasing its 

depth of understanding of the supervised organizations and key 

vulnerabilities and by enhancing the level and size of the embedded onsite teams at the largest institutions. The published reports 

on the number of examiners cited in the question are generally correct. Resources allocated to the largest organizations have increased and are currently numbered at approximately 230. In addition, a wide range of subject matter experts support the on-site embedded teams. The Federal Reserve’s consolidated supervision 

framework for large financial institutions is described in greater 

detail in Supervision and Regulation Letter 12-17 issued on December 17, 2012 (http://www.federalreserve.gov/bankinforeg/srletters/ 

sr1217.htm). 

It is also important to note that, by law, the Federal Reserve 

must rely to the fullest extent possible on examinations conducted 

by the OCC, the FDIC, and the SEC. Each of these agencies deploys substantial resources in the examination and supervision of 

large subsidiaries owned by the largest bank holding companies. 

Q.3. When the term ‘‘unsafe or sound practice’’ was added to Federal law to authorize cease and desist orders, the following was 

stated to be the working definition of an unsafe or sound practice. 

Generally speaking, an ‘‘unsafe or unsound practice’’ embraces 

any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of 

which, if continued, would be abnormal risk or loss or damage to 

an institution, its shareholders, or the agencies administering the 

insurance fund. Financial Institutions Supervisory Act of 1966: 

Hearings on S.3158 Before the House Committee on Banking and 

Currency, 89th Cong., 2d Sess. at 49-50 (1966) (statement of Chairman Horne). 

Given the litigation and other penalties that Barclays and additional banks are confronting, do you believe that the allegedly purposeful false LIBOR reports British Banking Association raise a 

‘‘safety and soundness’’ concern? 

54 

1See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). 

A.3. Answer not received by time of publication. 

Q.4. In 2008, the New York Federal Reserve Bank had evidence 

that Barclays was intentionally manipulating LIBOR, and as you 

said in your testimony, there were numerous reports in the financial press about other apparent misbehavior with respect to 

LIBOR. The examination and supervision model used by the Federal Reserve relies extensively on the internal risk management reports and internal audit reports of the banking organizations it 

exams and supervises. 

Since 2008, has the New York Federal Reserve Bank, or any 

other Federal Reserve Bank, ever conducted an examination of the 

internal controls of any banking organization with respect to its 

provision of LIBOR indications? Could examinations of internal 

controls have prevented inaccurate reports from Barclays and other 

LIBOR reporters during the last 5 years? 

A.4. Answer not received by time of publication. 

Q.5. I have heard concerns from constituent savings and loan holding companies regarding the length of the comment period and the 

burden of the accounting changes required by the ‘‘Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule’’ released on June 7th. Can you discuss the expected costs and additional impacts to insurers that own savings and loan banks based 

on the accounting change to GAAP? Was the Federal Office of Insurance consulted with during the drafting process? 

A.5.As you know, the Board and the other Federal banking agencies proposed to revise the risk-based and leverage capital requirements in three notices of proposed rulemaking (NPRs) and the 

Board proposed to apply the revised requirements to SLHCs. 1 The 

proposals in the NPRs, in part, would apply consolidated risk-based 

capital requirements to a depository institution holding company 

and its subsidiaries. Currently, capital requirements for insurance 

companies are imposed by State insurance laws on a legal entity 

basis and there are no State-based, consolidated capital requirements that cover subsidiaries and noninsurance affiliates of insurance companies. 

In developing the NPRs, the Board sought to meet several legal 

requirements and policy goals. The NPRs are consistent with section 171 of the Dodd-Frank Act, which requires consolidated minimum risk-based and leverage capital requirements for depository 

institution holding companies, including SLHCs, that are no less 

than the generally applicable capital requirements that apply to insured depository institutions under the prompt corrective action 

framework. The current ‘‘generally applicable’’ capital requirements 

for insured depository institutions are calculated and reported 

based on the U.S. generally accepted accounting principles (GAAP). 

This approach is consistent with section 37 of the Federal Deposit 

Insurance Act which requires that accounting principles applicable 

to reports or statements that insured depository institutions file 

with their Federal regulators be ‘‘uniform and consistent’’ with 

GAAP. If an alternative accounting standard is required by the 

Federal regulator, it must, by statute, be ‘‘no less stringent’’ than 

55 

2See, 12 U.S.C. 1831n(a)(2). 

GAAP. 2 Accordingly, the Board, consistent with section 171 of 

Dodd-Frank Act and section 37 of the FDI Act, proposed that savings and loan holding companies, like insured depository institutions and bank holding companies, calculate and report their regulatory capital ratios on a consolidated basis using a framework that 

is based on GAAP. 

The NPRs also are consistent with the Board’s long-standing 

practice of applying consolidated minimum capital requirements to 

bank holding companies, including those that control functionally 

regulated subsidiary insurance companies. This practice eliminates 

incentives to engage in capital arbitrage by booking individual exposures in the legal entity in which they receive the most favorable 

capital requirement. 

In developing the proposals, Board staff consulted with the Federal Insurance Office on issues related to capital requirements and 

stress testing. The Board also sought public comment on capital-related and accounting-related issues that may affect savings and 

loan holding companies when the Board published a notice of intent regarding these companies on April 22, 2011. Board staff also 

has met with a number of industry representatives to discuss challenges associated with applying consolidated capital requirements 

to savings and loan holding companies, including those challenges 

related to using GAAP. 

The Board has received numerous public comments on the potential cost and implementation challenges for savings and loan holding companies, including those savings and loan holding companies 

that do not currently use GAAP. Board staff and Board members 

have also met with representatives of savings and loan holding 

companies with large insurance operations about the concerns 

raised in their comment letters. The Board is carefully reviewing 

all the public comments on the proposal, including those related to 

potential costs and burdens related to accounting, and will continue 

to take these concerns into consideration over the course of the 

rulemaking. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM BEN S. BERNANKE 

Q.1. During the hearing, I asked you to address concerns I have 

regarding the increasing role that banks are playing in our spot energy markets, including the crude oil markets. I particularly asked 

this in light of the regulators’ October proposal on the Volcker Rule 

that would exclude all spot commodities and physically settled forwards from coverage of the Volcker Rule’s trading account. You responded by suggesting that Dodd-Frank had excluded spot commodities from Volcker Rule coverage, and I indicated that this was 

not the case. 

I would like take you up on your offer of further conversation 

and analysis of the issue. First, let me share some of my views on 

this matter, and I would like to understand your views in light of 

them. 

56 

1See, e.g., Ned Molloy, ‘‘Energy Risk Oil & Products House of the Year 2011: JPMorgan’’, 

Risk.net, Jun. 9, 2011, available at http://www.risk.net/energy-risk/feature/2072271/energyrisk-oil-products-house-2011-jp-morgan; Morning Zhou, ‘‘Traders Boost Oil Storage on Offshore 

Tankers by 75%, Morgan Stanley Says’’, Bloomberg, Apr. 26, 2010, available at http:// 

www.bloomberg.com/news/2010-04-26/traders-boost-oil-storage-on-offshore-tankers-by-75-morgan-stanley-says.html; Wall Street Banks Quarterly Commodities Trading Risk, Reuters, Oct. 

18, 2011, available at http://www.reuters.com/article/2011/10/18/commodities-banks-riskidUSN1 E79H0M920111018. 

Although Dodd-Frank does not explicitly name spot commodities 

and physically settled commodity forwards in the trading account 

definition under the statutory Volcker Rule, that definition is exceedingly broad and expresses a clear Congressional intent to cover 

all instruments banks use in the course of their trading activities. 

Moreover, Dodd-Frank provides regulators broad authority to include ‘‘any other security or financial instrument.’’ In other words, 

the text of the statute might not explicitly include the items in 

question, but it does not take that ability away from the regulators. 

Indeed, any explicit decision to exclude them would be made by the 

regulators, and I would assert would be a misreading of Congressional intent. 

For your reference, below is the pertinent statutory text: 

(4) PROPRIETARY TRADING.—The term ‘‘proprietary 

trading’’, when used with respect to a banking entity or 

nonbank financial company supervised by the Board, 

means engaging as a principal for the trading account of 

the banking entity or nonbank financial company supervised by the Board in any transaction to purchase or sell, 

or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or any other security or financial instrument that 

the appropriate Federal banking agencies, the Securities 

and Exchange Commission, and the Commodity Futures 

Trading Commission may, by rule as provided in subsection (b)(2), determine. 

Senator Levin and I further make this clear in our February 13 

comment letter on this subject: 

The law provides no statutory authority to exclude transactions involving spot commodities or forward contract 

transactions that are to be physically settled from the 

Merkley-Levin Provisions, nor should they be excluded. 

Until relatively recently, banks and their affiliates were 

not major players in physical commodities. Today, some 

banks have become major traders of physical commodities, 

using transactions which can be high risk, give rise to off 

balance sheet or other hidden liabilities, and involve difficult risk analysis. For example, some banks such as 

JPMorgan and Morgan Stanley are reportedly trading and 

storing physical quantities of crude oil and other physical 

commodities, 1 and engaging in trading activities and investments that regulators may be hard pressed to analyze 

for risk or conflicts of interest. 

In addition, these transactions invite the very types of conflicts of interest that the Merkley-Levin Provisions are deVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
57 

2See, Saule Omarova, 63 U. Miami L. Rev. 1041 (2009). 

signed to prevent, since those same banks frequently engage in commodity transactions with and on behalf of their 

clients. 2 Although these types of transactions are not explicitly named in the statute, they are covered under the 

‘‘any other security or financial instrument’’ language of 

Section 13(h)(4). In addition, excluding these types of 

transactions from the statute would create incentives for 

banks to circumvent the law by designing transactions utilizing these exclusions. In addition, given the strong relationships between spot commodities and their corresponding futures, excluding spot commodities would create a significant loophole that would undermine the intent 

of the provisions. Given the risk of evasion, all of these 

transactions should be subject to the Volcker Rule safeguards. 

Not only do I believe the statutory approach is clear, but the policy basis for being concerned about banks’ spot commodities and 

physically settled forwards trading is very strong. Recent events, 

including the JPMorgan Chief trading loss, the trader manipulation of LIBOR cases, and the on-going investigation by the Federal 

Energy Regulatory Commission into energy manipulation by several large national banks, all highlight how the culture of proprietary trading is so rife with conflicts of interest and risk that it is 

highly incompatible with client-oriented, economy-serving traditional banking. Indeed, many trading activities may even be so 

risky as to be beyond cost-effective regulation—a point suggested 

by Federal Reserve Governor Sarah Bloom Raskin in a recent 

speech in Colorado. 

Given these lessons, I am highly concerned the regulators would 

seek to ignore the statute and pass up the opportunity to use the 

Volcker Rule to hopefully prevent potential problems in our energy 

and other commodity markets, including possibly preventing another Enron. 

Please share any additional views you may have in light of this 

information. 

A.1. Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) generally prohibits banking 

entities from engaging in proprietary trading. As you noted, section 

619(h)(4) of that Act defines ‘‘proprietary trading’’ to mean ‘‘engaging as a principal for the trading account of the banking entity or 

nonbank financial company supervised by the Board in any transaction to purchase or sell, or otherwise acquire or dispose of, any 

security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or any other security or financial instrument that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission may, by 

rule as provided in subsection (b)(2), determine.’’ See 12 U.S.C. 

1851(h)(4). By its terms, section 619(h)(4) does not mention or specifically apply to spot transactions in commodities. 

As you point out, the Act permits the Federal Reserve, OCC, 

FDIC, SEC, and CFTC (the ‘‘Agencies’’) to extend the prohibition 

58 

on proprietary trading to ‘‘any other security or financial instrument that the [Agencies] may, by rule as provided in subsection 

(b)(2) [of section 619], determine.’’ See, id., The Agencies invited 

comment on the appropriate scope of this definition, including 

whether the Agencies should extend the definition to include spot 

commodities. The Agencies received over 19,000 comments regarding the proposed implementing rules, including, as noted in our 

discussion, comments that specifically addressed the definition of 

covered financial position and the scope of instruments that should 

be subject to the ban on proprietary trading. The Agencies are currently considering these comments as we work to finalize implementing rules, and will carefully consider your comments in implementing these important provisions. 

Q.2. Similar to the concern I have with the exclusion of spot commodities and forwards from the definition of the trading account is 

the proposal to exclude repurchase agreements and ‘‘liquidity management’’ positions from the trading account—and hence the entire 

coverage of the Volcker Rule. 

As I indicated in Question 1, the statute does not provide a path 

for excluding items from, the definition of the trading account. It 

provides only one avenue for avoiding from the prohibitions of the 

Volcker Rule: an additional ‘‘permitted activity’’ under subsection 

(d)(1)(J) of the statute. This path was expressly provided so that 

regulators could, if needed, add permitted activities. Although 

these activities would not be subject to the prohibition on proprietary trading, they would remain subject to other protections under 

the Volcker Rule, including data collection and backstops on highrisk activities and conflicts of interest. 

Senator Levin and I, in our February comment letter, made this 

point clearly: 

The Merkley-Levin Provisions do not provide any statutory 

authority to create exclusions from the definition of ‘‘trading account’’. To the contrary, it authorizes the regulators 

only to expand the definition of ‘‘trading account’’ to include ‘‘any such other accounts’’ as they determine. Thus, 

regulatory discretion is only in one direction. 

Positions held outside of the ‘‘trading account’’, as defined 

by the statute and [ ] should [they] be expanded by the 

regulators, are not directly covered by the restrictions in 

the Merkley-Levin Provisions against proprietary trading, 

much less their protections against high-risk assets, conflicts of interest, and other protections. 

The definition of ‘‘trading account’’ was carefully worded in 

the statute to take into account multiple concerns and deliberately designed to have a broad reach. The statute does 

not contemplate or provide for exclusions from this definition. If regulators want to allow a new permitted activity, 

then they must do so pursuant to the authority under Section 13(d)(1)(J), which would ensure that the new activity 

remained subject to the other limitations in the law applicable to all permitted activities. In short, there is no legal 

standing for these regulatory-created exclusions from the 

59 

definition of ‘‘trading account,’’ and they should be removed. 

Given that many of JPMorgan’s Chief Investment Office positions were held, they claimed, as liquidity management positions, 

complete exclusion of liquidity management positions from the 

Volcker Rule would not only be contrary to the statutory text but 

also highly troubling from a policy perspective. 

Please comment on whether you intend to close the liquidity 

management and other exclusions from the Volcker Rule trading 

account definition. 

A.2. The proposal by the Agencies to implement section 619 of the 

Dodd-Frank Act requested public comment on a definition of ‘‘trading account’’ that generally restates the statutory definition, with 

the addition of certain details to provide greater clarity regarding 

the scope of positions that fall within the definition. That definition 

covers trading activity conducted principally for the purpose of selling in the near term or profiting from short-term price movements. 

The Agencies proposed to clarify that transactions taken as part of 

bona fide liquidity management activities, repurchase or reverse 

repurchase arrangements, or securities lending programs are not 

covered within the trading account because the banking entity’s 

purpose for engaging in such transactions is not to engage in selling in the near term or profiting from short-term price movements. 

For instance, banking entities conduct liquidity management activities as part of a program reviewed by the Agencies to ensure that 

each banking entity maintains sufficient, readily marketable assets 

to meet its expected short-term liquidity needs, and thereby enhance the safe and sound operation of the banking entity and reduce its risk to the financial system. Similarly, repurchase or reverse repurchase arrangements and securities lending transactions 

operate in substance as a secured loan with set terms agreed upon 

at the start of the arrangement, and are not based on expected or 

anticipated short-term movements in asset prices. 

The Agencies invited comment on the proposed exclusions and 

the Agencies received over 19,000 comments regarding the proposed implementing rules, including comments that specifically addressed the issues you noted in your question. The Federal Reserve 

and other rulemaking agencies are carefully reviewing those comments and considering the suggestions and issues they raise in 

light of the statutory restrictions and provisions as we work to finalize implementing rules. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM BEN S. BERNANKE 

Q.1. I am concerned about the April 10th supplemental notice of 

proposed rulemaking issued by the Fed. In this NPR, the Fed ignores the letter of the law in Dodd Frank, and proposes to vastly 

expand its own authority to designate nonfinancial firms as SIFIs 

‘‘predominantly engaged in financial services’’ by adopting a broad 

definition of the term ‘‘activities that are financial in nature.’’ 

During the Senate’s consideration of the Dodd-Frank Act a bipartisan amendment that significantly tightened the bill’s language regarding SIFI designation for nonbanks. My concern was that the 

60 

committee-reported bill gave the Fed and the FSOC broad discretion to adopt a drag-net approach to SIFI designation—and in 

doing so, pull in many commercial firms that Congress did not 

want included. 

The Vitter-Pryor amendment cured this defect by limiting the 

designation process to only those firms that are ‘‘predominantly engaged’’ in financial services. This amendment created a new standard for SIFI designation. Under it, a firm must be predominantly 

engaged in activities that are financial in nature to be subject to 

FSOC designation. It also linked the ‘‘predominantly engaged’’ definition to the tight definition of ‘‘financial activities’’ in the Bank 

Holding Company Act. The language is crystal clear—‘‘activities 

that are financial in nature as defined in section 4(k) of the Bank 

Holding Company Act of 1956’’ qualify as ‘‘financial in nature.’’ The 

Senate rejected adding a clause to this amendment granting the 

Board the additional discretion to consider activities ‘‘incidental to 

a financial activity’’ as defined in section 4(k). Nevertheless, the 

Fed in its April 10th NPR, has decided to ignore the clear letter 

of the law and unilaterally expand the definition of this term. 

In that NPR the Fed rationalizes its action as necessary to not 

‘‘severely undermine the purposes of Title I.’’ This is not the Fed’s 

decision to make. Given the explicit language of the statute, the 

Fed is not empowered to try to divine the ‘‘purposes’’ of Title I by 

sifting through the legislative history of Dodd-Frank. The language 

of Section 102 and the legislative history of this provision make it 

abundantly clear that the language of Section 4(k) controls, and the 

Fed has no discretion to bend the law. Moreover, the debate surrounding our Amendment make clear that the Congress intended 

this language to mean exactly what it says. 

The Supreme Court has repeatedly upheld the proposition that 

agencies must defer to clear Congressional intent. In K Mart v. 

Cartier, Inc., the Court wrote that ‘‘if a statute is clear and unambiguous that is the end of the matter . . . the agency must give effect to the unambiguously expressed intent of Congress.’’ Given the 

precedents, what basis does the Federal Reserve have for its attempt to qualify the clear language of Section 102(a)(6)? 

A.1. Questions 1 through 3 relate to the provision of the DoddFrank Act that requires the Board to establish, by regulation, the 

requirements for determining if a company is predominantly engaged in financial activities. Companies that are predominantly engaged in financial activities can be designated by the Financial Stability Oversight Council for supervision by the Board if the FSOC 

finds that the firm could pose a threat to the financial stability of 

the United States. 

In April 2012, the Board invited public comment on proposed 

rules implementing these provisions. The public provided a number 

of comments on the proposed rules, including with respect to the 

proposed interpretation of section 102 of the Dodd-Frank Act and 

the treatment of physically settled derivatives transactions. We are 

carefully considering these comments as we formulate the final 

rule. 

Q.2. Chairman Bernanke, in the April 10th release, the Federal 

Reserve attempts to justify its proposed action by citing section 

61 

102(b) of the Dodd Frank Act. That provision permits the Fed to 

establish ‘‘requirements’’ for determining whether a company falls 

within the definition of ‘‘predominantly engaged in financial activities’’. This provision explicitly notes that this term is fully defined 

in section 102(a)(6) of Dodd Frank, correct? Where in this provision 

does the Fed get the authority to override clear statutory language 

and qualify the definition of predominantly engaged in financial activities? 

A.2. Please see response to Question 1. 

Q.3. Mr. Chairman, will you assure this Committee that the Federal Reserve will abandon this effort at unilaterally expanding its 

legislative fiefdom, and comply with clear letter of the law in Section 102? 

A.3. Please see response to Question 1. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM BEN S. BERNANKE 

Q.1. As you know, the Volcker Rule becomes effective under the 

statute on July 21, 2012, regardless of whether a final implementing rule has been finalized. As you suggested before this Committee several weeks ago, the agencies are unlikely to meet that 

deadline. Also, in the interim, the Fed has issued guidance on actions ‘‘banking entities’’ should take during the 2-year conformance 

period in preparation for complying with a rule that doesn’t exist. 

With that as background, can you give us a status report on the 

interagency negotiations on the Volcker Rule and some idea as to 

when the agencies are likely to release the next version? Can you 

give us any insight as to what will be released? 

A.1. Last year, the Federal Reserve Board (FRB), the Office of the 

Comptroller of the Currency (OCC), the Federal Deposit Insurance 

Corporation (FDIC), Securities and Exchange Commission (SEC), 

and Commodity Futures Trading Commission (CFTC) (also known 

as the ‘‘Agencies’’) proposed rules to implement section 619 of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act); as part of those proposals, the Agencies met 

with many interested representatives of the public, including banking firms, trade associations and consumer advocates, and provided 

an extended period of time for the public to submit comments to 

the agencies. To enhance uniformity in both rules that implement 

section 619 and administration of the requirements of section 619, 

the Agencies have been regularly consulting with each other in the 

development of rules and policies that implement section 619 and 

will continue to do so. 

The Agencies have received over 19,000 comments addressing a 

wide variety of aspects of the proposal. The Board and other rulemaking agencies are carefully reviewing those comments and considering the suggestions and issues they raise in light of the statutory restrictions and provisions as we work to finalize implementing rules. The Agencies are also carefully considering different 

options in order to effectively implement section 619 of the DoddFrank Act in a timely manner. 

62 

Q.2. Given the sheer number of questions you asked in the Notice 

of Proposed Rulemaking (NPR) (several hundred), is it feasible to 

go forward at this point with a final rule? Or will you need to issue 

a revised NPR with a comment period? 

A.2. Please see response to Question 1. 

Q.3. I disagree with the premise of designating any entity a ‘‘systemically important financial institution’’ (SIFI). However, it is my 

understanding that, although not perfect, the SIFI designation 

process in the United States is more transparent than the G–SIFI 

(Globally Systemically Important Financial Institution) designation 

process. I am especially troubled that confidential company data is 

being collected to make G–SIFI determinations without a clearly 

defined G–SIFI methodology in place. 

Given that the Federal Reserve is a member of the Financial Stability Board (FSB), which will make G–SIFI determinations, can 

you clarify how a company that is designated a G–SIFI but not designated a SIFI in the U.S. will be regulated? For instance, how 

would an insurance company that is currently regulated at the 

State level be regulated as a G–SIFI? 

A.3. In considering whether to determine that a nonbank financial 

company could pose a threat to U.S. financial stability and subject 

the company to Board supervision and prudential standards, the 

FSOC is required by statute to consider various factors set forth in 

the statute that could result in a different determination (either including or excluding a firm) by the FSOC under the Dodd-Frank 

Act than a determination that may be made by the FSB. For instance, one factor that the FSOC must consider is the degree to 

which a firm is already regulated by another financial regulatory 

agency. 

The Board and the FSOC are working with the FSB on a number 

of initiatives, including the process for identifying globally systemically important financial institutions and financial market infrastructures. Furthermore, the Board and the FSOC are working to 

ensure the consistency of the approaches used by the FSB and the 

FSOC for assessing whether a nonbanking company is systemically 

important and to better understand the potential for different determinations. 

Systemically important nonbank firms designated by the FSOC 

and bank holding companies with total consolidated assets greater 

than $50 billion will be subject to enhanced prudential standards 

established by the Board. By contrast, firms that are not designated by the FSOC and are not bank holding companies with 

total assets greater than $50 billion that are designated as G–SIFIs 

by the Financial Stability Board would be subject to internationally 

agreed-upon standards. 

Q.4. In a hearing on March 22, 2012, I asked Treasury’s Under 

Secretary for International Affairs, Lael Brainard, if she anticipated a situation where a U.S. company is not designated a SIFI 

by FSOC, but is designated a G–SIFI by the FSB, and how such 

an institution would be regulated. In her response, she noted that 

‘‘U.S. financial institutions will be regulated in accordance with 

U.S. laws and regulations.’’ She also said: ‘‘Through its membership on both the Financial Stability Oversight Council and InterVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
63 

1See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). 

national Association of Insurance Supervisors (IAIS) committees involved with the development of the criteria and methodology, 

Treasury’s Federal Insurance Office (FIO) is pursuing an international consensus that aligns the IAIS criteria, methodology, and 

timing with the Council (FSOC).’’ 

How will you ensure that the U.S. SIFI designation process is coordinated with the G–SIFI designation process so that the integrity 

of U.S. law is protected? 

A.4. Please see response to Question 3. 

Q.5. The Federal Reserve’s recently proposed capital standards implementing Basel 3 and section 171 of the Dodd-Frank Act include 

an effective date of January 2013 for insurance companies organized as thrift holding companies. However, section 171 of the 

Dodd-Frank Act states that any requirements of that section shall 

be effective 5 years from date of enactment (July 2015). 

Can you clarify these effective dates as they apply to insurers? 

A.5. As you know, the Board and the other Federal banking agencies proposed to revise the risk-based and leverage capital requirements in three notices of proposed rulemaking (NPRs) and the 

Board proposed to apply the revised requirements to SLHCs. 1 The 

proposals in the NPRs, in part, would apply consolidated risk-based 

capital requirements to a depository institution holding company 

and its subsidiaries. Currently, capital requirements for insurance 

companies are imposed by State insurance laws on a legal entity 

basis and there are no State-based, consolidated capital requirements that cover subsidiaries and noninsurance affiliates of insurance companies. 

In developing the NPRs, the Board sought to meet several legal 

requirements and policy goals. The NPRs are consistent with section 171 of the Dodd-Frank Act, which requires consolidated minimum risk-based and leverage capital requirements for depository 

institution holding companies, including SLHCs, that are no less 

than the generally applicable capital requirements that apply to insured depository institutions under the prompt corrective action 

framework. The NPRs are also consistent with the Board’s longstanding practice of applying consolidated minimum capital requirements to bank holding companies, including those that control 

functionally regulated subsidiary insurance companies. This practice eliminates incentives to engage in capital arbitrage by booking 

individual exposures in the legal entity in which they receive the 

most favorable capital requirement. 

The requirements under section 171 generally apply to depository institutions holding companies that were not previously supervised by the Board, including any savings and loan holding company, beginning on July 21, 2015. Separately, section 616(b) of the 

Dodd-Frank Act modified section 10(g)(1) of the Home Owners’ 

Loan Act (HOLA) to authorize the Board to establish regulations 

and orders relating to capital requirements for savings and loan 

holding companies. Thus, section 10(g)(1) of HOLA provides the 

Board with separate authority to establish by rule capital requirements for savings and loan holding companies, apart from the speVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
64 

cific minimum requirements and other limitations that are imposed 

by statute in section 171. 

Consistent with the Board’s authority under section 10(g)(1) of 

HOLA, the NPRs provide that savings and loan holding companies 

would be subject to consolidated minimum capital requirements beginning on January 1, 2013. The Board received numerous comments expressing concern regarding this proposed effective date, 

including from savings and loan holding companies. In light of the 

comments and the wide range of views expressed during the comment period, the agencies issued a joint statement on November 9, 

2012, noting that the agencies do not expect that any of the proposed rules would become effective on January 1, 2013. The Board 

is considering carefully all comments received, including potential 

implementation challenges for savings and loan holding companies 

with insurance company subsidiaries and the appropriateness of an 

extended effective date, and will take them into account over the 

course of the rulemaking. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM BEN S. BERNANKE 

Q.1. The Federal Reserve’s strategy of keeping interest rates low 

through ‘‘Operation Twist’’ has been aided by global uncertainty, 

which has risk-averse investors seeking the safety of U.S. Treasuries. At the 10-year Treasury note auction on July 11, investors 

accepted the lowest yields in history, just 1.459 percent. These low 

rates have neither spurred economic growth nor materially lowered 

unemployment. Rather, they are creating ‘‘unintended consequences’’: (a) Retirees are facing personal budget cuts as their 

savings yield next to nothing; (b) Businesses, which finance much 

of their working capital on a floating rate basis, are reluctant to 

expand; although their cost of funds is low currently, it is likely to 

rise just as any expansion plans are implemented and their working capital needs rise; and (c) Independent banks are struggling to 

remain profitable while managing difficult conditions caused by the 

combination of artificially low interest rates, weak commercial demand, lower debit card fees, and the rising cost and capital requirements for interest-bearing customer accounts. 

Since yields are already at historic lows, what purpose will further quantitative easing serve? How much lower could rates reasonably be expected to go with further easing? 

A.1.It is true that Treasury yields are very low, but there is scope 

for the Federal Reserve to ease financial conditions further in order 

to strengthen the economic recovery using nontraditional policy 

tools, including purchases of longer-term assets. The unconventional easing measures undertaken by the Federal Reserve in recent years have been effective in contributing to lower longer-term 

interest rates, higher asset prices, and generally more accommodative financial conditions than would have otherwise been the case. 

More accommodative financial conditions, in turn, stimulate economic growth by reducing the cost of borrowing for businesses and 

households, and by raising household and business net worth, 

thereby boosting aggregate demand and reducing unemployment. 

65 

At its December meeting, the Committee announced that it was 

increasing policy accommodation by purchasing additional mortgage-backed securities at a pace of $40 billion per month and would 

purchase longer-term Treasury securities at a pace of $45 billion 

per month after the completion of the maturity extension program 

at the end of the year. The Committee indicated that unless it sees 

evidence of a substantial improvement in labor market conditions 

in coming months, it will purchase additional agency MBS securities, undertake additional asset purchases, and employ its other 

policy tools as appropriate until such an improvement is achieved 

in a context of price stability. The Committee also indicated that, 

as always, it would take appropriate account of the likely efficacy 

and costs of its purchases in determining the size, pace, and composition of such purchases. 

The conditioning of purchases on economic outcomes helps to create an automatic stabilizing effect in financial markets. If the economy weakens, market participants might expect additional Federal 

Reserve purchases and that expectation should contribute to a further easing in financial conditions. Conversely, if the economy 

strengthens, investors might anticipate that the Federal Reserve 

will scale back its purchase of securities and that should contribute 

to a firming of financial conditions. Thus, the ultimate extent of the 

Committee’s purchases, and so their impact on yields, is uncertain 

at this point. 

Q.2. How would further easing and low interest rates affect fixedincome seniors unable to move their money into higher risk investments? Given that this segment of the population is growing, could 

depressed consumer demand have negative effects on the economy? 

A.2. The Federal Reserve recognizes that the accommodative policy 

the Fed has put in place means that individuals with savings invested in fixed-income assets may receive lower interest income for 

a time. However, the returns on fixed-income investments, as well 

as other assets, fundamentally depend on the strength of the economy. Moreover, the Federal Reserve’s policy actions also boost stock 

prices, home values, and other assets that are held by many households, contributing to higher household net worth than would otherwise be the case. A stronger economy benefits savers and all 

Americans in myriad ways, including stronger income growth, improved job prospects, and improved access to credit. 

Q.3. One major effect of the crisis in Europe is that European sovereign debt from many countries is no longer considered riskless. 

How has this affected demand for Treasuries? What effect might 

increased demand have on consideration for further easing? 

A.3. It seems likely that investor concerns about the situation in 

Europe have boosted the demand for Treasury securities and put 

downward pressure on Treasury yields over recent years. In making its monetary policy decisions, the FOMC takes into account all 

of the factors that it believes are relevant to the U.S. economic outlook, including the effects of the fiscal and banking crisis in Europe 

on financial conditions and U.S. economic activity. As the FOMC 

has noted, strains in Europe and global financial markets represent 

a significant downside risk to the U.S. economic outlook. The relatively modest pace of the U.S. recovery and the associated downVerDate Nov 24 2008 14:28 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\07-17 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
66 

1 1 See, 77 Federal Register 52888, 52909, 52958 (August 30, 2012). 

side risks, in turn, have been important factors underlying the 

FOMC’s decision to provide further monetary policy accommodation 

over recent years. 

Q.4. The State Budget Crisis Task Force just released a report 

identifying ‘‘Six Major Threats to Fiscal Sustainability’’ (http:// 

www.statebudgetcrisis.org/wpcms/wp-content/images/Report-ofthe-State-Budget-Crisis-Task-Force-Full.pdf). One key finding is 

that ‘‘Underfunded Retirement Promises Create Risks for Future 

Budgets.’’ One factor that allowed state treasurers to underfund 

pensions is assuming unrealistically high rates of return for retirement investments. If the Federal Reserve extends ‘‘Operation 

Twist’’ again, what is a realistic rate of return for conservatively 

managed pension funds? 

A.4. The returns to long-term investments depend crucially on the 

strength of economic activity, the rate of inflation, and the stability 

of the financial system. The Federal Reserve conducts monetary 

policy to foster its statutory objectives of maximum employment 

and stable prices. To this end, the Federal Reserve has reduced the 

Federal funds rate to its effective lower bound and has increased 

the size, and changed the composition, of its balance sheet in recent years to help make financial conditions more accommodative. 

These monetary policy actions have been motivated by the desire 

to support a more robust pace of economic recovery in a context of 

price stability. It is in the interest of everyone—including pension 

funds and their beneficiaries—to have an economy that is performing at its highest level of its capacity consistent with long-term 

price stability, which, in turn, would increase the returns on longterm investments. 

Q.5. Recent statements by Barclays Bank and the Bank of England 

indicate that the LIBOR rate has been subject to manipulation 

since 2007. Can market confidence in this rate be restored? What 

is the appropriate role for the Federal Reserve in establishing a 

credible, transparent market-based interest rate index that protects American borrowers and lenders? 

A.5. Answer not received by time of publication. 

Q.6. The Federal Reserve has proposed risk-based capital rules 

that do not distinguish between Savings and Loan Holding Companies engaged primarily in banking and those engaged predominately in insurance. Considering the differences between these 

lines of business and their related risk-based capital requirements, 

is it realistic to expect that the complexity of issues related to this 

important rule can be adequately addressed in the current comment period, which is scheduled to end on September 7? 

A.6. As you know, on June 7, 2012, the Board and the other Federal banking agencies (agencies) proposed to revise their risk-based 

and leverage capital requirements in three notices of proposed rulemaking and to apply the revised requirements to savings and loan 

holding companies (SLHCs). 1 The agencies jointly extended the 

comment period from September 7, 2012, until October 22, 2012, 

in response to requests from the public. The Board is considering 

67 

carefully all comments received, including potential implementation challenges for savings and loan holding companies with insurance company subsidiaries, and will take them into account over 

the course of the rulemaking. 

68 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

69 


Monetary Policy Report 

to the Congress 

Submitted pursuant to section 2B 

of the Federal Reserve Act 

July 17.201 2 

Board of Governors of the Federal Reserve System 
70 


Ltltter of Transmittal 

IlOARoOI' G{)"'I!R>'JORS or Tll~ 

FI'Vl,RAL Rf~Ek'lh SYSllit 

Washington. I).C July 17, 2012 

THE I'RESlDhNl 01 11 11; SbNATI. 

TilE SPEAKI,R or TIlE I rUINeOr REPRESi:NTAlfVI:.s 

The Iloan! uf Gowmors is pkascd to submit ill; .l!iJllelllrJ' Pi!liry Rrpflf/ /(J liJr COIIgru.! 

pUrl,uanllo iit'\.' LJon 211 of the Fi.'l.kral Rcs<:..'1VC A<.'L 
71 


Contents 

Part I 

Oren-iew: Monetary I'olicr and the Economie Outlook ... 1 

Part 2 

Rt'('('nl Economic and Financial l)ewiopmenls ..................... " .... .. , .. " ........... 5 

DOMCSTIC D EV\iWPMf].ITS ................ .. ..................................................... 6 

The Houschold Sector .... 

CQIl.!tI/lIl'r Sll~ndilt~ (lIId Hfil/st hold Fmollce ............... .. 

Hliu in~ ACliI'ilYlllllf Housillg Firlilllcf'. 

The L~incss Sector .. 

Fixl'd "11"1'$1111('111 _ 

. ..... 6 

. ....... ... 6 

8 

.".10 

H __ ••• 11) 

Inr/'lilory fllrt'SIIlIen/ ................ ,', .............. ,', ............................................................. 1 \ 

C(lrf/orale Profits 01111 Busilless FinaneI' 

Th~ OVl:rnm~nl SL'l:[ur , 

Fl'lwmi Gorrf/lmrlll .• 

Sum WId lAtal GOI'erml1Rm 

The hlernal St"CIOr , .... 

........ 12 

""" ................ ................ ,,]4 

................. . ....... 14 

. ... 16 

"",16 

E.vwm"mu/lm/Klf/s , ................................................................... , ........................... 16 

GlI/llIuodilY and Trude P/'itl'S ....... 17 

Jill' Curl"l'nllIllIl Fill(1l1riol AU/Jums ........................ 17 

Nalion:tl Saving .. . ........................................................... ".18 

Th~ L~ Xlf Ma k~l .. ",19 

Emfl/I))1l1elllund Ullrlllf!/O}wt'1II ................. . .......... 19 

PI'Ullurtil'ilY (1lul Lalw ComrenSllliol! . ....... 20 

Pric~s ..... ",,21 

FINANCII\L D EV[LOPMIiNTS ............ 22 

M(ln~lary Potiey Expttlllliuns and Tr~asury Rat.:s ________ _ "" .. 22 

Short· ~nn F\lnding arl.:~ts , ............... ,' ............................. ,' ......... . . ..... , .. 23 

Financiul lllslilUliuns .............................. " ........................ . . ....... .25 

Cnrf"'l)ralC l:kb( ~nd Equity Mark~lS_ ."-_-"" .... 27 

Mon~lary Aggregates and th~ F~dcral R.:scrv~·~ Balance Sheel . .. ....... ".".29 

INTERNATIONAL DJ:V\,LQI'MJ:NTS, ............ " .•.. 

lnl~matj nal Financial Markcb .. 

AdvanCl:d Foreign Economil:S 

Emerging M~rk~t Economi~'S .• <0 .. 

. ........... "" .......... .32 

. ....... .32 

.. ",35 

....... "--" .............. -"" ... .37 
72 


Part 3 

Monetary Policy: Recent Developments and Outlook ................................................ 39 

Monetary Policy over the First Half of 2012 ........................... . ..... .39 

FOMC Communications ......................................... . . .... .41 

Part 4 

Summary of Economic Projections ................................................................................... 43 

The Outlook for Economic Activity. .................. . ............... .46 

The Outlook for Inflation .......................... . ................. .46 

Appropriate Monetary Policy ...................... . . ........... .................... .49 

Uncertainty and Risks ............................ . ...... .53 

Abbreviations .......................................................................................................................... 57 

List of Boxes 

The Supply of Mortgage Credit ..................... ...... .. ............... 10 

The Capital and Liquidity Position of Large U.S. Banks ............. .. ............... 24 

Implementing the New Financial Regulatory Regime ............. .. ................. 28 

An Update on the European Fiscal and Banking Crisis ............................................ .34 

Forecast Uncertainty .................................................................. . ..... 55 
73 


Part I 

Overview: 

Monetary Policy and the .Economic Outlook 

Til< )'('," of <X\!oomic I\"W'~!) KPr<~rJ 10 h:wo jJ"",\'\I 

JUT1I\1Ih<: flrll half of lhL'l ta~ with rc:.11!ft'JI' d~roo:· 

lie rnxlU<\ \(JI)I'lI;~y h:t;il\i n!l:1l11! (>n1y. mvd<:'S1 

n the Iabolf ",artol. the rill~(I( joh ~ainsh, 

diminrn.«I """'"IIy, iI/lu, fuU('IIloinj::' peri<J<J of imprm.m~nt, tht unemplulm<!Il nl!~ h., t-..,<,n tiUI< 

chanl;'<d ~I ~n tlmlcd kvtl .;n..'C lU\~"I)', MtM"hile, 

oonsull'l<r rri« ,"" .. lOll ,,,,,r tho Urla fi~ 'Mnths..,r 

2012 was kl~'Cr. 00 n~l. Ihnn in 2011, ond 1oo1".-lCrm 

inlhll"," "'pcc1Hlions h",'~ .. mii"oJ ,table. A numm 

of faa.,.., .. illlik<ly "SIr"';" ",,~nom"'W""" lh in Ih. 

~,.;oo """ad, inrludiOl .. cal< m)1IOID;" groo>1h abrood 

"nd. fi~a1 'nvironmcnllhaliook'''1 I~ """"III< kl:S 

u.:C()Illm()dali~ UII<<r1ainlyub.;)u( \btsc fU.1on m~)' 

.ilio mlnin houl<hoId and W$l1ICSS ~ndin~. In 

l\Jdilion, credit conditionl an: lik,1y 10 impnlV< only 

gr~JII~lIy, au", <!iU.dc"atoo i""'"IOM ,,( ,';loanl and 

fOl"<kll"d ~Qme$ ~r<m'tr, Ih<-pomibilill'(>f~ rur· 

lber mal<'1ial dCltfKmilion of oondiliollS in LUNpo:, o. or . ranicularly s.,,"'" ch.n~ .. in US fill<3l ""Bd;tion~ 

1'-"" "Muilicanl J",.~d< ri<b 10 1I1< (lUI klok 

Ag1Un~llhi, baokJrop. lh< fakral Open Mark<.1 

1;'lIJlmill""ln rM C) look ~Icp< to rrovid< ~ddiliottal 

1MIl~.uy rclioy ;J('t~mm~~li()ll durinS the fiNI half 

of 21)12, In plIrticula,. In. C~mmilla>ch~n~."J ill k>,. 

wa,d guidaDO< n:gardlllE- Ibc I'-'1lM mer which It 

~nllcipal~> the feilt,:ol fundi rlu, la r<1lI.1.io _I o.~I" 

1",.>lIly low lc,.b ~nd inooullUll ~ runlinualion of ii, 

malUrily<mmion program (MEl') lhmugh tllt.nd of 

tilt yctlr, Tb<!I<' fIillid<s put dO'lltn\ll;\,J pmi'JUn: ~n 

lon~Nenn WI<",'$\ rales an.l m~ok IlroIid finall<.ial 

conJiljoo, 1I\<)n: >ICC<lmm<,dlUil\: Iban thc~ would , .. h· 

'f""~ Ix. Ih ~(by SUI'f'Orling In_ <WIIomic """'W .. r 

Tht [urOf"'a" 6~ IUld bank ilij! ,riu, h~s n:mained 

u m~j()l" JOur,,, ~f st ... l. on global filUlndal mark<1~ 

ea,ly in lhe )ur. fma!'ICIal il~ will1io the cum art" 

mcdcr3lCd som<l<ha\ in hghl of a numoooJ J'Oli'1' 

;IC1iM,: ThI' Eumf"an C.mrol ll:lnt (ECII) provi!kd 

~mplt- hquiaitY)(j Itt<: rtgion"~ hanks. .uro-art~ I •• den 

~gr=I 10 in~n:~1it lhi: k'<ldin~ cavacity of thei, ~"U< 

focihtin, ancl, O~ : .. "Hla= packagcfo, GI\~"'os 

al'fl11l"'d followil1j! 11 rnutlC\uring of r,rttk ii(M'rclgn 

drbt, liOl'o\"o"", trn!itllU will1", tile rum an:alncrc~ 

aga,n in the ij'rllng III political unrcrtainu<! ",bodlw 

fCOln of ~ disordrrlyGrttk (~it rl'llm the "UIU at<;l ~oJ 

m~~n()11$ k'i."" at Sp;onnh Wnk. mlo.",«1 ~u"'li<)ns 

~bQul III< !~stain:.b;liIY cf Srain'! 1000000tpl debt anJ 

lbe rc1il i.1\ty Qf (hotUn"..,.:. brulkinSs)"Sl<m AI 

)'idJ, \lII tilt ,owmmonl d.'ttl 0( Sf'3in ~nd <lIh •• vu\. 

nmllk European <:(IUnlnes "»< to""arJ n~w high!, 

"uro-ma lead.,., I\"Sponded Wi!h lIJJitlOnol p.lJi<) 

m •• suIC'$ in late JUI)<'. illduJin~ i •• ;rcfIJins.th. ~;bi)" 

h) ~f the re,wn", tin . .,.",;;01 batk'l~po ",d makiD$ 

rt~ IOYoa,d grf~tc r c""'p.:ralion in lhc,uJlCfvi~on 

ltId. IS UC"<:eS!lIry. r=pila/izalion "f furor'." banh. 

Many crilica1 d.[;jil~ h"",~"" •. n:n,.in 10 be "'lI",.d 

oul HI/aiM a backJrop of """tinu,d N.'", ..... '" ""ai., 

nlllll1lJ1d ['Jlili<;al strain 

Fin,ncial ma,kots "'tre so""",h~1 vo!ltilc <lV<T 1he 

first h.U of 2012 m<JS1l)" du<to ~"<IUa(ini';<"1 

n:(Il\,dil!j! lbe "Tim in the "U,\1 ~",a ~nd the i~"cly r:tl~ 

M C<,"(llKlmir ~"1h at eand abrolW. As in\"rSlill"S' 

OQIIC<fOS oOOUllh<luu;ilWl1In l:uropo t4<d rally in 

Ih. Y<4r and "ilb d.ta n:lcasn gcnel1ll1y coming in 10 

lh. upsW 01" m.rUt'Ir«lati~ brood .quity I.n.:. 

i~ .. """,;md risk sr"",d~ in Il<V<tlIl markc\J Il'Ir, 

"","cd. Su"""'lll<l1lly. no" ...... '. n1lll~t I"""ticil'.nll 

rullal kick from ristie wru amid mtclwd roacern! 

~t.Jut IhH~rt, .~a ~DJ <"iJ'met" or JIo .... 'ns ~Io!>al 

economIC sro"·ln. Rolkctllli UI<SC de_dormonl! 001 

also QWin~ 10 IlK J."1IEl~nInS Qf lit( f",.,. .. tIl rale iuitlailC\'. c"Ontinuation of Itt<: M l'. ~od in<rt4'd <X)l«l". 

lio11s hy maW'1 participant, of adJililmal halanc< 

Ih .. tllelWn, bylbo Fed'ral Krs<JW. yirlds ~n kmgcrkrm Tre-~SIlry :s<I'untic:t and C<lI"p(>rlUe lkbt lIS IIdJ as 

nil..., on laldeollal mOl1~ages dIXlilltlt, on n<1. Md 

",adlN histM<"tIly1 ..... 1e",1! iIIllJllCS durin~ tbc first 

haU of tlw )"31. On Wan"" sine<' th' hesmning"r l~ 

)".r, ilI\'«d «l~il)' prices NS< '" .;Ql"JIOw< eaminl'S 

rem.11ntd fairly n:silirntthro"~h tl\c finl qu~rtcr. 

1111.,. ruln~'l ~n ~Mual r:ueor 2'> I"fc'el1t in tile 

lL'Cond half uf lOll. n:nI GDl'mrrcOO:ll a:1 ['CrtTnt 

pac< in tm ~nl Quarter of :!<l12, tncl avadabk indicatM' PQlnl 10 a i1i1l smaUe, gain in lhc ;.:wnd Quarter 

n"ol.lIpCnclm~ ».1nlWUd '" bo ...... gh<J down b)' II 

'''''go of f",'(OI}' includ inll unteTlainl~ ~bout d<"'clapm'nll in Eul"01'" and tnc path for U.S. rt!l<'fIl f'l1i<)". 

C(lnrcrn, about thc !Irtngth .nJ ,uiil"inabililY ()f the 

ft>.'<1 ....... y. the SliU-{lncmil: Il;il~ofttt<: hou~n~ markel. 

and In< difflaJhi<ltnat m.nylOOllld,b.-IlorM>'crsoon-
74 


Monetary Polic)' Kcport to Ihe CongrtSS 0 July 2012 

linu. 10 haY< in oblaining =dit. Such consirlrf1llions 

h", .. made som. busin.SSts more cautioltS aboUI 

il'lCl'tasing in'"tSIm.nl Of mal<rially '~p.1lIding Iheir 

payrolls and h", .. ltd households 10 rtmain quit. pessimistic aboultoor incom. and .mplO)'m.nl prospffit 

Smoothing through Ihe .ffects of unscasonably warm 

~ .. ath<r Ihis pasl winter, ac1i"ity in Ihe housing sectOf 

appears to havr b«cn a liul< strong<f SO far this ) .. ar. 

I 1O\O .. ,,,r. the ", .. I of housing OCli"it)' rtmains low and 

<ontinutS to be h.ld dO\O'n by lighl mongage crulit. 

M.anwhile, th. dragon rtal GDP gro'oI1h from govtmment pur<:hases is likel)' 10 persist. as budgets for Slal' 

and local g<» .. mments remain strained and federal 

fiscal pol'-':y is likely to Ixwm. mOrt rtSlrit1i"e in 

2011 

In Ih. labor mark<1, gains in private pa)'ron .mr!oYment ",=gt<l225.00CI jobs I'" monlh in Ih. first 

quan." up from 165.00CI jobs per month in It.< second 

half oflaSl ) ... r, but fell bock in lhe SIXOfId quanerto 

just 9O,OOCI jobs per month, Allhough Ih. slO\Oing in 

lhe pac< of n<l job rn:ation rna)' h"," b«cn .~agg<ral.d 

by issues rtlat.d to sv.ings in lhe " ... 11ler and to SCasonal adjustmenl difficultics wociat.d "ith th.liming 

of the sharpest job losses durin, the rtCt!:Sion. those 

fOClors do nOI appear to fuUy aa;ounl fOf th. slowdown. Th. u1l<mplO)'ment rat. dedin.d from about 

9 pem:ntlasl summrr 10 a still .. ltvated 81'1 prn:tnt in 

lanuary, and it has .. mained close to thai b .. 1 since 

lhen. l ik .... ise, long-term joNe.." ... has sho"n liul< 

nel improyementlhis year. ",ilh the share of Ihose 

unemployed persons who have been jobless for 

s,< mont'" or longer rtmaining around 40 prn:tnl. 

Furth., m.aningful .. dUClions in un.mployment art 

likely to .. quire SOme pickup in the pac< of teonomic 

ac1ivit)" 

Consumerpri« infiation mo'~ dO\01\, on net, during the fi"t half of the ) ..... The price index for ",-.rail 

personal consumption expenditures (l'eE) rose rapidly 

in the first th ...... months of the ) .. ar, retketing large 

illCreases in oil price~ bul inllalion turned dO\OlI in the 

spring ,,-hen oil prien mo .. than reversed lheir earlier 

run_ups. In all, th.I'CE price ind.x increased at an 

annual ,ate of about 1\4 prrc<nt """ the fi"t 

five monlhs of Ihe ) .. ar, compared "ilh a rise of 

2~ percent during 2011, E.u:luding food and enel])', 

consu",", prices rose at aboUI a 2 percent ratc over lhe 

first five montns of the ) .. ar, close 10 the pace ~ 

""" lOll. In addition 10 the n<1 declin. in crude oil 

prices <worth. first half of Ih. ) .. ar, faclOrs contribut_ 

ing to low consumer price inflation this ) .. ar illClud. 

lhe de<el.ralion of non..,iI impon prices in the laner 

part of lOll. subdued labor costs associated -..itb tbe 

-.."ok labor market, and ,table inllalion expectalion .. 

In Ih. household sector. credit <;ondilion, ""'" gen_ 

erally rtmaioed light for all but highly rat.d oorfQ\\"rs; 

among other factors, Ihis tightncss rtfi«:ts th. UOCtrlain economic outlook and the high ull<1Tlployment 

rate. Total mortgage d.bt d«:rtased funher as the pace 

of mongage applications to pIli":has< a new home ~-as 

sluggish. Rrfinancing ac1i'li ~ increastd o'~r Ih. coo"., 

of Ih. second quan .. bul rtmained below l""rs 

rtached in prnious rtfinancing booms despit. historically low mortgage inl.rtS1 rat~ TIt. illCrtast in rtfinancing was partia!ly attrib\llable to f'tCrnt <ohanerm.nts mad. 10 th. Home I\ffordable RrfinaOCt 

Program thai appearul to boost rtfmallCing acti,;ty 

somewhat for oorro .... rs"ith und.f\\llt.r mortgAgesthat i~ for those: whoo ... ed mort on their mortg~~ 

Ihan Ih.irhomcs ,,~rt "mlh_ Consumer credit 

e.<panded moo..at.ly mainl~ be<:ausc of gro'oI'th in fed_ 

eral 'Iudenlloan .. 

Firms in lhe nonfonancial OOTJXl!lIte SWOT continued 

10 raise funds at a geOtraily moo""l, pan: in the first 

half of tt.< ye .. , Those: ... ith access to capilal markm 

look ad'o'antag< of 10'" int.rest rates to rtfinance <:<isling debt. I\s a result. corporate debt i"uance "as solid 

0"(1" the first part of the )ur. although issuanCtof 

speculali""_grade corpora!' bond, " .. ak.ned nOlably 

in Jun. as in''eSt()l'$ pIlll.d boct from ri,tier assctl 

Comm.rtial and industrial loans on Ih. books of 

bank, .. panded brisk I),. oot bo"""ing conditions for 

small businesses ""'" impnwed more oJo,o.lj.' than have 

Ihoo< for larger firm .. FinallCing conditions for commercial rea!.,late stayed r.rati,~ly reslrit1i, ... and fundamental, in Ihat SCCIor s!lO\O .. d fe .... silins of 

imrnwemon1. 

Market s<ntimcnltoward major global banks fluctuated in tho first half of 2012. In Man;n. Ihe .. b .. of 

the result. from lhe Comprehensi'~ Capilal I\nalysis 

and Kov;""', ,,-hich inve-st()l'$ interpreted as indicaling 

continued improvements in lhe hea!th of domestic 

bank~ provided a significanl boost to the equity prices 

of U.S. financial inSlilulion .. Those gain. panially 

.. ' ...... d when m .. let..."timrnt "orsened in May, 

dri, .... in large part 10)' con=ns about Europe and 

potrnlia! spil1=" to the Unit.d Slat., and its financial instilutiool On balance, ho-.."'~r. equity prices of 

banks rose .ignificanll)" from relati'~ly low b"l. at the 

start of the )"ar. I\n index of credil default ... -.p 

.pread. for the large bank holding companies declined 

aboUI &:J basis point .. rot those .pread. remained .1 • 

high ""'I. f)"spitethe sv.ings in martel sentimenl 

aooul global bantinll organi! .. tion .. condilions in 

un!<CUred short-Ierm dollar funding markm " .. re 

fairl)"stabk in the first ha!f of 2012. European financia! institutions h", .. reduced their demand for doUar 
75 


funding o.~r """nl quarters. and gtneral funding prtsSUttS apparenlly .. ~re albiar<d by Ih. ECB's IongtrItrm refinancing optralioo~ 

""Ih II>t Commill«c anlicipaling only slow progm:s 

in bringing unemploymenl do ... n lo .... ard It.ds Ihat it 

judges to be consistent ";Ih its dual mandate and 

strains in global financial mark.lS continuing 10 post 

significanl do .... nsid. risks 10 lhe =nomic outlook. Ihe 

FOMC took addit ional sttl'S to augment lhe alftady 

highly acwmmodalivt Slanct for mon.lory policy during the fiN( half of 2012, In January.lhe Committ«c 

modified ils forward rate guidaoct, nOling Ihal tronomic conditions ,,= likely 10 .... arranl.xctplionally 

low ItI-tls for Ihe federal funds rate at leasl through late 

2014, And in June, Ihe FOMC dtcidt<l to continue Ihe 

M EP unlillilt .nd of Ihe )'ear rather than compl'ling 

II>t program allh •• nd of June as prtyiously 

schffiult<!. 

The Jun, Summary of l!conomie Proje<:1ions is PItStOlt<! in Part 4 of this rtpOft. Allh.timtof IheCommitt«'s June m«1ing. I'OMC participants (lhe 

7 members of Ihe Board of Go\"trnors and the pmi-

<ltots of the 12 Federal RCSl:rvc Banksl""" the 

cconomy expanding al a modcnuc pace cr.'u coming 

quart<rs ond tl>tn pitting up gradually undtt th. 

assumplion of appropriat. monetary policy. Mosl par_ 

licipanlS marked dO'o'lllhcir pro~lions forcconomic 

gro .. 1h in 2012 and 2013 rdati, .. to .. hal II><y anlicipaled in January and April largely as a result of Ihe 

ad.~,... developmenls in Europe and the associated 

effects on financial mark01L Moreover, he"""inds from 

lhe fiscal and financial siluation in Europe, from the 

slill_depressed housing martel, and from tighl credil 

for SOmt be",,,,,.-.,,.. ...-ere ciled u likely 10 hold back 

lhe pace of <conomic e.pansion ~ tbe fOrecast 

poriod. 

FOMC participant' aI"" proje<:1ed slO'o'"<r progress 

in reducing unemployment than they had anticipated 

IJiJdni of Govtmon of rh~ fN,ral &sm" ~)'sum 3 

in January and April, Committ«c participants' proj<c_ 

lions for II>t un<mplo)'m'nl rate had a ctnlra!ttndtncy of 8.0 10 8.2 po"",nl in the fourth quarter of Ihis 

) .. ar and tl>tn dtdined 10 7.0 10 7.7 ptflXnl "Ililteod 

of 2014; thost: 1t'~ls are Slin gtnually " .. II aOOvt parlicipanl$' estimates of II>t longtr-run normal ralt of 

unemploy",ent M.anwhile, participanls" pro~lions 

for inflalion had a ctnlra!tendency of 1.2 to 1.7 por_ 

ctnt for 2012 and I.S 10 2.0 po""nl for bolh 2013 and 

2014: lhrst proj<clions a~ lo-.."r. parlicularly in 2012. 

Ihan parricipanls reporred in January and April. in 

part ~lIt<:t ng lbe effects of the """01 drop in crude oil 

prict~ 

\Wh Ihe uoemplo)"mtnt ratee~pected 10 remain 

d"'ated 0\ .... Ihe proj<clion ptriod and ioHalioo genually e.pected 10 be al or under the Committ ... s 2 por_ 

ctnl obj<cti .... most participanl$ expecled Ihal. under 

Ihcir indi,;dual asltssmtnts of appropriale montt.ry 

policy. lilt fedotal funds ralt would remain .maordinarily low for some lime In particular. II of the 

19 participants plactd Ihe largel ftdtral funds rate al 

0.75 pem:nt or 1000~r allhe end of 2014; only 4 of 

th<m SaW the appropriate rate at 2 ptm:nt or highff. 

All parlicipants rtportffi It, .. !!. for lbe approprialc largtl f«l.taI funds rat. al Ih.end of 20141hal ""re ,,~11 

btl"", th.ir estimates of II>t ItI-tl0.'pffied 10 prtvail in 

tbe longtr run. In add ilion to proj<c1ing only slow 

progress in bringing do .. 'n untmplo)'ment. most par· 

ticipants ..... ' the ri,h 10 the outlook as ,,-';ghted 

mainly to\\1Ird slO'o' .. r gr<l"th and higher unemploymont. In panicular, parricipant' notN Ihat main, in 

global financial markol~ Ihe prospect of reduced fi=l 

accornmodalion in the United Stain and a general 

,1000dO\\n in global <conomic gr<l"tb poltd significanl 

risk, to the reco'~ry and to a {urther improvement in 

labor market conditions. 
76 


, 

Part 2 

Recent Economic and Financial Developments 

reonom'" a<:IIIily al'l"aI'S to k~ .~pa"<kd (II ~ 

so",.,,,,hal .k>¥.-.:r f"l'" <mr lh< firlll hair of 21112 Ihan 

in th. >ce\lnJ half ~r WI I. An" rising III an ",,"ual 

rale of 1'1, p<m.'I\l in I~ 5I.WIIJ h:llf of201 I, ..aI 

~ ~<)m<SticrrOO i:l (UDI') L".;;nascd 011.1 1'"""'"1 

f'll<" in Ih. fiN! quart.,. of 201 2, IiJld waUa!lk' indicalors roint 10 a still mallor gain in Ih. StC<lnd ~uall.r 

(figurt I). An impenanl f~IOf in~\It",mimmomk 

and financial d.,~Iopm<n!llhii )tar Ii Ih. unf.1lJillJ 

lid ""d b:lnkin~crOO in ~uropc.IGd .. d. Ih.<oo· 

nomic OIIllook fo. Ihc ,.,oond half t>f 2012 dcp<Dd, 

cf\I<i:l1l)'on th ... lcnllo ,,'hich c",."",1 "",) poi",,!hd 

distUJ'lion, in Furor< dir«IJ~ ",duce U.s. .<1 ""I"'fli 

and ind~1y ""fI~il rri_alf OOrm$lic ~ndil1J! 

through :0.1''<:1"8<: spillo''tf dfe<.1! on U.s. tinanci", mar· 

~cu ""J inS1I1UUolll' and on lwusthold and busmess 

Cl'nfi .... ·!IC< AI the same Um<. the etonomy c\'IIlin!le:! 

10 r .... Olh,,. heaJwinJ>. ;nduJin~ "",I,;';t.d -acces; II) 

rome tYf"'$ of h(>ll)<~ld IIIJ small I:.tsin<'$' on'ilil .• 

shll siubk in>tnlory Qr vacant homos. ~nd 1m .. 

a~oomm<>da~vt fiit:d pol;""). 

The W>or marb:1 n:m";"" , .. al:: 1'Ii.0I< p~yroll 

employment slel'f!<'l up.,my in lbe year rot then 

,low"" in lh<<<CO!ld qUar\er(t~oup Ihose m(l'o',," mil)' 

h"," b<c~ ougger.Jlrd by ~""" rtillttd to ""Uogs in lb. 

---

pm<>I.- ~,,,,, H ...... -......r ...... .....,. .. -. ......... _ ........ __ .. I .. _ .... ~ 

.... ........ t>ot-"C-_"~""''' 

"""'Iher and 10 >C3SO!I1II "dj""tmrlll~ "nd tbe "'"-'Ill" 

rloymrnl rm< homed around 8Y. t""""~t an., a ~, .. 

niuc-.nl d«:rtm (l'o'l"r Ill< 1311'" months ~r 2011 ~nJ in 

Janu.ry .~D\tIhile, OOn,UJn¢l' !"i« inll.tkm. in p~r1 

bunct<'Il by sh'rr swin.,:1 In lb. prie< ()f gal(>\i,.,. 

Itepp«! up eorly in Ih< )'a, but SUbsr<juenlly tllm<d 

down. and longc, .. t<:rm inflation "'~jW1",ionll't'mainod 

Itabk-(~gurt2~ 

Hnancial ma,l>et.< "m: SIlmC'oln<ll VIlwi1eovn the 

fi..t hat/' or»12 monty duel" nllCluatinlll'i .... ~ 

"ga,JinJ lh< emi, in lbe ruru ... a"nd lb. likelyp"'" 

of e<;<"",mi< i""I"'1h . t hom.and llbro8d. Yields "" 

I~ngc' .. t~rm T'<lSury &t<:uriG",s h:rvt dtelinoJ lign;t' .. 

cantb'. I't'nf<'1ing fN'<!le, lIIQ/I<1ary !X'Ii..y IIO.\lII\ntQd:o .. 

lion. Ih. "~ak('f outlook .. Md saft-ba"011 ROIO'S. Broad 

in<kIt:! of U.s. ~UU)' prices 1'0'" on not, ris~ ~aJs 

On oorf'lll'31~ bo:onrl ........ gcncraUy uncbaog..'Il <lr 

!Iigllll)' !ww. a!>d unICCUred shon"lorm dQllar fundiug 

OIlI,k.t, wm f.irly <table. I).>bt issuano: by U.S.C<l'" 

r<oratiilnl "'111 10M. and Nink I""uling!~ lalj,"Cr fimll 

""as brisk. In !he ,"",schOld ~or. roruum<r , .... dil 

"_'I'"ndcd ..... d m<lftg~ rrnnancing activity in=a",d 

",,"""Ii), rdIOC1,oi lhe d."~ ... in m<"'pgc lilies to 

k~t",ic ",1y low kwls as ,,~n "S r=nl ch.1IgC'l to the 

II!IIIIC Alr"nl:lbl. Rdlnatt"'- 1'rognIm I! II '~ 

2. Chll,. on !be <1=I-'l'I'" pntt """" lOr J'CI*lII:H 

_ptioaapendilurc>·. :!OO(i..-11 

-

........ n. ..... -, ...... _ ..... \1.,.3It~ _ ... 

--.,...- SCO<n "' ""-<_",,,,-,11.001!>-
77 


OonK'Stic [k\elopments 

111e Ill)lIsdwld S«10r 

Q)",1if1Ml' SPtnJIII# illlJ II(Mf~tllJ f~ 

A~ .. risinl'al on OM"'" raJ' of *"ul 2 p"''''nl in Ihr 

SlWnJ half or 2011. ",al p<rs<>naI rons"mption ~'p<n. 

dilUm/PC£) inm: .... "'<l2'>if'-TCCnl in Ihef,1'$I ~uarlc:r. 

001 avaibbk infMmllion su~ru Iho' ",:II rCti dettl. 

~rato<J SQIll< in Ih< s.:wnJ qUa/Ic:r (f!.!luR: 3), Tit< f,,,,,· 

qua"cl iw:mISt in spending octurn:d 1IClC& M broad 

array cf ,,1(IIh and scr;i.'t$ wi,1I Ib< I\()labk r~(>;plion 

of OUlIo)~ iQ .. n<:rgy SCM'<'$, ~'hi<h "' .... hdd d"" .. 

by miuceJ dcmllllJ fo, M:lling hecallSC "f 110<= unllta· 

iQnahly warm winler. Sr<nclin~ 1)11 cntfsy SCMet< 

'rp<'''' '" II"", .. hounclecl in tM <tWnd qu,"", ""Ike 

" .. ropeIOl< W",I<I fM' " .. ~ 10 , ",1.lj,,,"y muR: I}l'ir:ll 

Jprin\!. ln conlrut, Iht jWXof mOl(l! ''thi.:lual<:!; 

edged d()'fI'n in Ihr !«Ond qu",w. and rtl'<'rI! on 

rtlail iIalo:s !UUCSI Ih .. CI,)IISUml:l oullays O~ ~ wid< 

r"n~ cf i'ems '0$: loss "'ridl)' Ih~n Ihe)' did in III, 

~"'I quart.,. Th¢ ",oo<ralt oS' in ",,"Wm<1 sptnding 

<l"t' Ih. fin.! h;llf of lilt yell! ocru,rtd gaimllhe 

t..<l:cl"'l' of the ron<id ... blc m,nomiccllall .. '11S'" <1ill 

fa<.in, m"ny households. im:lIJ ding high u"emrloy' 

,",'Ill, slul'iish pi<l$ in empklytru:nl. ltpi<l Yl''''lh in 

i!lCQfn<, SliU·slrtSStJ bai:lnC,-d Ih .. l~ li~1 =~ 10 

S()II1e 1)1"'" of =di~ and lingering p«<'mism .beut 

job and In"","", prosI"'m \Vjlh incre",," in <p.'!Iding 

OUlpatinl! growlh tn income so forthi. ) .. ar. th. p;:'. 

rona! JaVin~ raleconiinueJ to decline, on ntl, Ihough it 

""""'nod "'ttl ahoVe I<wb th31 prevailed Woreillo 

""",,,,ion (Ii~u", 4), 

---

I I ",0' -L. j 11 - , 

-

-. 

l\ggrI:ga1e re:d d;.po.abk: I"'nona! 'nCOlll" (DI']) 

p< ... onol income less personoll ........ aJju5IN fer 

ehaIl!!." in prioe._rosc mOrt r~pidly over Ihe tiril 6", 

"",nih, of Ih. )"<>f thon it did in 2011. iro part b.a.U5l' 

of d.dining <'"'"y pri"" s (fi~'IIrt S~ Th. "iago and .aIary ooml"'""nl of rtal 01'1 ...... lIell rt~eclS hoIb Ih. 

numbe, of houri "",t.d .nd "' .. r~~ hourly "''lI~'' 

adjulted r"f innllliQn. roll: 31 an annuill rale ,>I' neIIfly 

]V, rcrtcnllhrough Ma~ of this)w ~n" hlo\>;1ijl 

in.·~ lIuimilar p.l«in ))11. Tho: immlS< in mil 

,,1Igtl and 5oll.,y income so f<ll' in 2U12 is wBtly .lIti\>o 

utable 10 lb. m<>dcsl imp",,-.:mrnl in <mplO)omrnt ~nd 

. C'b>nJ;< in rd diop<>Wojo r<rSOIIOi ~:on<! '" .... 

"wuwt.>l"l'd"""",","<Jl (J,~11 

-_.-

, , -- -~ _'lOII'I_:!ItO'I9~lGl&I "!ll ll 

_·~2jj1! .~._'- .. ~.lottGll, _._~ .. \Ioy,.....t_ .... ..t.y_ ...... ·_...,. .... ....,. __ tor .. ~ -"-- "":1<1' ~ .. r_._ .. ___ . 
78 


hours work.:.!: noa] "'mlS" hon'lyeomingJ~'" lillie 

changtd I~UJ for Ih;~ yu. 

Th. '»Iio <>f nuuscl!,,1d ni,'\ ",mth to in~otn., ill tho 

"W"<ptc.illOVtIl up J1i!lhlly (uT'lhu In II>< firsl ~uafl'''', 

n:"<t'linl ;1lCrt'M<"'S ill t>olh "'-'US< prkn anJ f\lU;ly 

plires lng~rt 6). T akln~ ~ Iongcr 'i~ lhis raliQ ha,s 

b<en "" &<low UI''''"dfU ~nhi""" 1000l, ~"d ""hii<;1 

.. main.. far Ixl""" Ic,d~ srrn in the )tar< l<aJinl ur to 

1I1. ,oressioo, il isal)lul(tjuallU ilS II'I'~ tm'nllt 

"",I 2(1 )'t311- J 1000000h"JJ·k~ d:l.l~ Ihrou,gllWIO IndiC.1IC 1001. ""'allh ~ were l""P"rtionalciy Luger (Qr 

Ill< middkJ'Ol'lion cf lbe "",;)Ih dislrib\llion ""1, 

~urprisin, J\'S\I\~ 1Ii'<tIlbc I'<l:I.Ii'l: imJ'Of1ln'" oJ' 

bo~nt~mVnllhc ~tJO( 10= nou""hoJd!. M(OIn· 

.,nik, indi<;atof! of rottSUmt, scntiment art ab<:Mo 

tl1<irl""," (",m l:ut rommorbul h:f.'t )'tIIQ ",Ium 10 

I"".~ ",,'CIs lfig"'" 7) 

1l<>ll ... h~1Ll debt- lb. j"m ~r mOfljWg< aDd",,"-

~um<' <kbI cdgtd oo..'n again in lbc firs! qllllrt<r "r 

21)11 Rj Ill< oonlin",'Ill;Qntr.:lion in m,trtg.w: d<bl 

'<I'M lIhn<l!ll 01!'.<:1 b)' !IGIW ~rallJivc in ~~mcr 

crolit With the mhlClion in ft,;\oschold dtt>t.low le,,1 

of II'l(Ijl ifllcml raJ", and mOOts! ,iNWlh of incom~ 

It.: do:bt«rvir:c , .. io lhe IIW'Cg.t10 rcquim! rrincil'aI 

and inl"",," p"yments "" ~isli"l hou;oll.,ld dd:>I .dati", 10 illCOlllr-<i«l'<a!<'Il furtbcr, n~ allhr~nd of 

lhe fir!! qUMI,'r, il $I()OJ ~l a H:''tI 1.uI.'ItI:n in 1M 

(fi~ure 8), 

G.miWner credil <xp,mJcJ 4t an onnuai rale "f 

ab<lut 6'. j>=tnl in the lirstl;'" 1Il000ths Qf 20Il 

driwn by &/I increas< In Mnl\ .. ~villi credil. nu, romp<)!l\",11I<WUnlS [Of aboull~lhi'<UQfMl\ OQII-

_"mer cre<\il and plIlIlarily COnsl>lS of autO and ,IU· 

-

- , 

-. 

, 

- , 

" t , I t II 

-:!III! 

l/<.,. -Ik_""'_""""""_lt)tl.QI Do_ -_ .... _._ ... -" ....... ,..--1 

-

s.-. ........ "" _____ ... __ .. 

_.,"-"c-._ .. ", ____ 

", .- ... ,,. 

, . 

• 

• 

~ 

• 

~"" -1\t~1I<oN_ - .. '-""'''_''''''_ lO'~"""". _ .. _ , .... . ,.. 'w._ 

-........,. .. ~-.................... . ,..-y_f«""lOl~ _n.(..,...,.,._"" .. _._""""tOll.l"!«1 __ ._,, )01""-"'''-<:<-'' 

d"nt 10",,\ Th rise in ""nl\"V()lvintcT\:'Il,t W f~, Ihil 

ye., .. 'al pnmlfily du: 10 tbe Sirongth in Jlum,nll"aJU, 

.. bleh ..... , oImOOI onh,dy"rigioal.:.! ~nd IIIn1l.d by 

lh. ftdcr.>l govtml1lCflt. Mtanwhik, 3Ul0 loani mam· 

lainod a s1C~d) pIIoX of il\i.~ R<"l'lvmS ('OOSUm<f 

m,dil (primarily credil tard IrnJing~ n:mJinw much 

mo", 5lJbd""d .. the firsl fi,,, """,lit< or In. year in 

pari boca"", nonprimr borro""l'S conlinuod to f= 

l;ghl unJcr.o.'rilin¥ ~l3nd".d~ O<.1:rail. lhe i""",,,,,,, in 

COft"'''III,rcrtJil i'COnslSt"nl wilh "",,"I "'SI"'''''' 10 

IIt<Stniur LooD 1)f1ia:r Orin;.,., SU"''<l' OIl 0"". 

Lrnding Pr.01L'CS (SLOOSI ,~clic.ton~ 1I1al. d<m"ncl 

_ .. _-

" ' 

I'>IL ·Ik _ ... _~ ................ :lll.Q1 Dolo "" .... 

-~-"---~""""""-"" :.n ... __ -....w _,_ \)001 '100 .. "" "-'" .-_ ........ _-_. 
79 


8 MOl!<ta,,' fu~,,' RI:!Xlrl to 1M U>~ D lui), 2012 

had Jil"'f1glhmed and !<Iatloar<ls ha" ta.!t<l. on "'I. for 

!ill con>umorlo.n ca~ I 

[Olorrsl rates on <.IlfUUI!I<-'f lMnl$'1ll'nd\y cdJ!l!d 

,Io"'U in the lirl' h'llf of 2012. and Il"/'Ud.< un th<st 

[!\it"1 rdat"" IV Trta$ury "",urilIN <)( tQItlp3nbk 

ILWlurily heid fairly Iltad)' In pIIrticular. iDlmsl r~t<$ 

"" now OnW loans <.Ilntil\ll<J 10 bt ~"il.low_ 1 [" .... '~r. 

Ih. 'I""..d of nltes OJ! <",dil",n.I klam ",I,," ... III L/le 

I"'~~"'J! T I'lOIlUI'Y yi.ld 1111$ rtmalfl(d -..)d. siD~ Ih" 

'nd o[ 2iOl in rail btc.,"" (Ij' ",il:inS .djU3Lm<nli 

made in rt3poo:iC 10 J1I'O'Iiwns incluJed in Ih. Crrdil 

c.n.I "'o«Iunlllljlilr Rc"lJ".l"Iibilil) .nd Dii'Clos"rr 

A<I \If 20"9.

1 

A~e inJ>c.l4oNof OOIISumercm:iil qulllity 

iml'fl)'loo [urth.r in Ibe firs( qUllrlu I)[ 2(111 Tbt 

dcli.qurrn:y 1'111< "" "",Jil <.uti luan$ rtg;Sle:rrd il; I" .... • 

dL If\~ <on<:t Ih. omobtg.n in I~L Tilt or"""1 

;mr"" .. "n,,n, ;ml""'l."ll), ",",'ell M rmg.'on~ OOIl1posi. 

1;'11\;,[ ,lui'! in INal credit ",rd "..t~ncu \(N-lrd I).ormw. 

t/'$ wllh 1Iigh..,. cmliL=t\'S. ~". in p;!" to' tishl,,. 

IenJing ,lanJanis. Cba~-()Jfs ''" 01\.'(1;1 card lClli.lls 

.oo<k<: in~. mtcltinS \c"<i$i!IJ1 iltCn 11111\ •• nd (l( 

~7 DdiMjl.ll.llti\:5.nddlarB"-<,fii on Mnrtl,\lhini 

OOn5UnW! it>11I1 al c~mm~rciol bank! 01$0 ..... lfCd \qII ..... 

10 !rltb '1;$~lly bclO'O-' ll\<il n;<Io>ri<;a[ N>l'ragt~ In 

HJ~il;~n. I .... Jdluqu<ncy rale 011 UI O loom .. fin""", 

Ll!lmpanics Ikma.;..-d 51itlUly IV ~ \(>1:1 til:!l is <1m IIu: 

middle of II' hlSiOricW rang<, 

I~LI.l/I"" lIf o;omUmtl iW<1-blIdtd >ocurilK:,{AII$) 

in Ihe lirS! hlll( Ii 2012 ~d iJ5uane< r\ll' Ih~u~ 

I"'n.,d In lOt I bill -"'3S slill bcl<l\l ['O'N:rISU \Nol; lfig· 

UN 9~ 1>SWI!lC<'S (11" ,,'<urilie! bili:r;..! fri aUIII kl<lni 

<wmillaltd til< IThIrtol for most uf lb. first holf, ,,'hil. 

sluMnl Ivan AHS liSU= W3labouIlh< ~m<' itS in 

Ill< pa:lt 1'"'<1 yea .. In OOtIlr.rst. i$su."", of credit CliIJ 

AfiSn'molUlcd weal< til, mrut ofl~ fil'SL holf of 1012 

IU JflJ\'I'th of erNil canll<.'l3ll1 conlinuo.! \0 t.- 5<lmo>-

"h~1 jubJu,"lI a:tJ Il'IOS! major boInb hJW clioor:n 10 

n~ such loans on lll->ir b.>.lallCO' shed.\. Y .. IJIlln A~S 

~nd III->ir ~M;. om <X1I!Iparabk·nulurily Slt"ap rales 

we", link: oh-..ngod, on n<l ..... llh. fil'Jl half of 1:()12 

~nd h<IJ stei<olyln til< I~w rMJ':llbathil>~ pm'aikJ 

1,"",,<3/'ly 20IO 

A"lil'ily t. Ihc housi"l: ...,Ior "rl"'ars III b< 011. 

~rddual "rlr<nd. IIlI-dt fro",,, \~ry depn:<sed Ie""l 

I. n.~\IXl'S"~,,"IlI<F«i<o>IR<"""II" •• .!'.~_ 

....... J~",.."_II,J"'.'<.l_'ilIrW)

:!. Tk"' o<lIo.b~_r""""""UutpllO<_"".",,_ "'_J"'_"'_""" ...... _ ........ _ .. """ 

.

.--,-,..--

--. 

" 

Sales or "'· ..... nd o.t~'n~ h()m<>h",~ rm 0(\ f~I IhlS 

)'l'8C. ~kd)' wrr<>rted by the low kl'd of ho\l!jC ,,,,,,,OJ ~a~ by 10'" '"tore!! rales for COnWlIt;ilSlal m~rlglgo.'i, 

f\lQ"''1heles.. tlw l""lom Ihal h .... ,. rtilr~III~J d'lIlaDJ 

f""'-(N-1I<r-«cupie<l nouSlog In """ot yom h.1I> )~I l~ 

dmlf'l!~ M~nYl'l'lenlia! t:..y~~ an' ,<l uctanl 10 pUr. 

clwil homes "'-'Cauoe ,,[ oa~ln¥ OO<IC\,"Qj;;bovt futult' 

l.rolll<. cmr/<l)'lllCDI •• nJ Ihc Ju'CClw.. ,,( hoU1< 

pncc~ In aJd;llon. li~hl mor1,~ll" finan~ cOIldl1l1ln$ 

I"""'ludt m~ny borro>omflOO1 ol>l:llni n~ I1\('Irt~j!<" 

orcJit. M~h 0( II!.: h~m. purch." J.m~nd thlll docs 

e:.i'l hJI ht<:o chMlndod 1\1 lho al>uotil4nl ~t.lck Ql 

1atal\1 MUses. Ihorcl>y ~mill1'li III-> "'1(>;10.": of_ 

C<ll1II">C1i~n lICIiv;IY III loch ~xpolniilnn vf Mm~oll al 

h'" oo:~rrcd. (jlltO lilt laf# nombe ... p[ rropcllits 

11;11 in. 01 at rl>k or b<in~ in. fi!n\C;IQlIllc, lhit overhang 

(lI.'tmllil;ol)"tQ C<.>nliollC to ..... igll on \\<III C<.>n.llrUCllun 

a<1l1uyf~r lIOn'letimo. 

l).:spito Ilto~ facton. housm~ SI~rLS I"we ri:len 

grad~ly 110 far Ihll )\:!If(ti~un' Ill). i"rt!m Jaml4ry to 

Muy. SI!)g).·fMlill' hQ1I$C1 \\otrc iLatlcd 011 an aonulll 

r.lclJf 495.uoo unit~ U]'> [n\Jt1 450.lU)w L/lo 

,,",,000 hlll[ or !OIl buL los. th •• h.df <>f tho .. CnlfC 

r~1Jf the p;i.'1 31)l~.rJ. Allbougillhc Un .. .,~Ml>Iy 

'II';Irm II.lnLer m.)· h(IW(I'otribultJ IOlh. ;n=Mt. lhe 

untkrlyi~ pac< 01 il<livi!)' likol)' ff!';e 5o.'mo as -..-.11. 

I""lord . .w~ OIl !ing).·r~m;ly p..,.mll jS>Ulln~ 'II .... kh IS 

Ic~ Ukoly hI boart",loo by "'CA!herl.oo 1Il1wrd u~ ~ 

lillto frum IIJ Ic\d laiC WI )'t'ar, fn lho mUlllfQmii)' '''''' 

\<If.ikm"od oas~mi" ",d ~>bust. LIS m.)Il) indi",Jllal~ 

and f"mili~ Ihal ~rr unOlbtc or UO'lli1linll<! rcha~ 

boJlM:I h,l>< ""ugbt uut ","1.1 unit~ ""~ ",,",11. L/l< 

,·ac:m."l" ralC f~r ",nlal hauSoUll hIlS r:l!kn IQ ill' Ie .... '!! 

Ic,<l ~in.:r 2002. flULLU1, up"'aro f"I\-"i<Urr ou rcn!SIIod 

Jpurring n.-w a'l1U1r\K1i01l Owr lilo: firl1 IiI'\! munlh. 
80 


-~---

- .......... 

"" .. , n._""~",_"",,,)lI)!oI! '-.. ,._._ .... ,,-

'" 

of the )'Oar, 110\1' muhifomii}' pm';:"1s .... rt Slarl«1 III .n 

"'mt'C annual r.lIe of.oo..l 22S,OO) "nil~ up rNm 

about 2OO,Imin lhe OC<'Ond hatr of 2011 bul :t!ill 

bdll~ Ill< 3I.IO,ooo.unii r~IC Ih~1 pl'l:\'!il'll for much of 

Ih. pr<vious dox&it. 

IInu", pri~n.;ij rn.asu..:d by KVtr.,] nali,'IU~ 

in.k.'I(:j, IlImN up in rtttni m()fllhs Mltr ~dgin~ dill> n 

further, 00 b-.l!Jr.tt, i~ 201 1 (flgu"", II), fur ".ample. 

III< C()rd.og)C lY!'"'oll .i:l1es ;ndox ""'" 4 p<ro:nl (nol an 

annual rlli<)OVC1" tJ,. fir" r..-. monliu:of the )'.ar. This 

r=nl ""J1fO\..."..,1 Dtllwilbnanding, Ih" m<~u'" of 

00...,. ('Ii""" """,:oj",30 r=tnl 1x1_,1S I"'at in .'1116. 

--o. 

• 

• 

» .. -~ • 

• ~~. '----'----. _ :'IIJO 2OIJ'I !!Ill 

>;c .... n.~~ .. FIIM_ .. ~..w'_ 

"',~lIII'!-n.c"",""",_ .......... _ .... ~JIII! __ 100 __ ""' ...... -."'-01.1\11' 110.-'" 

~,..,._ .... FlWA_I_Iy .. _-,. ... 

OIl'" .. ......... -.. .-.- ",.".,.1 _ I"""-< 

-~,.. .. ,~--.. -........... ---... -.,-- ~1<o~.C~ .. f'IFA. f«In>Il'-_< A.-.. "" $O~_._A_~ 

TIl< "'m< r..,l<m Ihdl.1't n:'IInUning~ng)o·rami y 

holUing ~)IUIru<:1ion "",0 <;<)tIli nllt 10 "",w. "II ho= 

prkts, ii>clliding Ih. blJ< in'~!\I"r) oI \~canl noll1<$. 

I;,hl morl!!ll8<= cn:dil eonJilionJ, and 1",,1:.1\1$1,.,. 

d<!ll~Dd 

Q!1~ rala; dedino:d 10 h!>loncaUy 10'<1' ~~ s 

"n~!h. fir$! Italf or 2012 tfiglll't 12). Whik <ignili. 

canl. Ih. dl"Ql'm m()l1pg<: rales 8,-", ... all~ ditJ nol totp 

fllIU ,"'ilh Ih. ,\eclines in tJ,. Ii<Ws on Trt ~"ry ono 

mortgage.ba,kcd IC<:",iOO (MilS). ('I\'bably rtHctli~~ 

slilI·dwdl<d ris.k :rvt:rsion ~nd ""II'!< C~fI"C;l~ .on· 

slr.inu amOll$ mortg.>g<: origin:tlQIl- Dc!pilc Ihe clrop 

in mO!1g~ ra .~ Imlny polenl,;lll)'qWil"'-Jrlbyl:»r· 

ru ... crs ba\~ h"" difficulty obtaining mort~ Of n:fi.. 

Mncirli ~"'" of litdil Jianu.ard! and (mns (~ lhe 

boo:"Th. Sul'~ly,.r on~ ",dil"~ A .. Hher fael<)f imr<Jing Ih.lIbi!ily of m~ny oorro.--rrs 10 rt/i. 

Manet, or 105tll tJ,.ir heme and ru",h;uc • "'" 0!Ie. 

h:l$ hI:cn lhe Pl1-"<';JjC!11X Qf "n<.icr"';!I,'" mcrt$"~ 

0...,.:>1), rcfinan~in~ lICIi. l~ in.:~ in Ih< SIXOnd 

~ual1<r)..,1 "'as S1illlru Ih~n mighl Ix (~f'."' I.d. giltn 

1M Itvtl of ;'ltCfI.'SI rales. ~nJ the plI,.~f m~ntmgc 

~rrlil;31ionj lOr hom<: pun:nas.:s n:mainw sluggish 

Il "'~r ... finl~i!lJ acti';ly allribulod 10 m..,,1 

rhI1lliOl \0 Ih" 1111 RI'- tlno uf ... hieh d""inaled cat" 

on !<-"n·ltl."OII"" 11IIiros for tJ,,,,,, wll" "~"'" rtlioanting 

mort~gcs aln:ady O"II1<J by gOl'tTtlmcnl"f'OI)5<)!N 

t'1llrrpnStS (GSf.sI- n-s P!<UU"P OI~r lh. filSl half 

of Ihe )\'<Ir. 

Ino;<31011 <>f eredil quWIIY '" lbe I'eSldrnliol mQrl· 

ga~ ~IIll"ClInljnll<!l (0 I'tnOXl ,lfa'nl OIl homc",",'nors 

CQIlf!1lnlin~ JepmseJ twm. void" and high "nem· 

plo)m<nl. TIlt fraclKln Qf cu""nl rrim- m<lrtpgl'I 

1.>«1Iming ddinq",.,,1 mnain.J at a hitdi .,,,,1 bul 

-

~~.(~I _: 

\t~ ~ . .......-- .. - I I I I I I liIo1! lPIII lPIll -. ./flIl1 lOll 

:0_ n. ....... MlI., ..... " ... _ ....... ~ (I ,'1I~ ... --,.»ynr- ---<---<.",....... 
81 


l(l MOrn:lary' Policy Ropon 10 II!c l;lngmsD Jul)' 2Q12 

The Supply of Mortgage Un>dil 

"""""'f1I<KIW~"~~Iht-i<np<.oI>I\I 

("ej,", II .... air", ,II< d.o_wl ('" h<Ming .",11 h'" 

II", "'t<lYerf in II", l .......... g!l!(l(Jr. lcllding5l .. -

d,'nl<"I'I .... w h. ''"''"'''''''''1' 1ig!>I<I 1" .. ,1"'-"1 

""" .... '" ~eb lr... """;I~ I""""", I"ely r* ."''''''1: hi"")' """lI'iI<>kh ft. ... pul<N!ihfl """"'s 

IIcroodiRglV II .. SeniQr IJJ;tn ()I'tj(:~{)pIrl"'" 

XI/\',-,,/ "n Ib", lJoMi"t; P~""(S.lOO';). (,"'" 

ntid-1OO7 "'I(> 2009, o.aw, JoooId'-"'" li&l>l_ 1 M 

.. ....t.ttlSIor "';&,.;01 """'-"'8''' ~ Ul 

bomw.<. wilh I1ri",. <"edit ~ " .. ""'I' to.w 

. -

, , 

h '" C ~as<.,J >I.Ind~ .00 Ih", 11igu'" AI. Io\o.Jr<-

""",.Ih . ... rl< .. k>o .. "'t •• d;,;""'" """"S"lI"'''''''-

Ii""", iii be "~"Il:d "hi\<: lile n",,'" ~ ~ 

~rit"."OOO"J...,,"" "~~.....;d,,""J 

SirnlI.rIy, II.,· oll,# '" ~ .. "'~ "" "'....,urij;- .,,<'<1 p<\trII' """'l?8'" h'" ,e"",,,.ed .lo:v:Ud ~oo;e IfflJ,>n ;hiite<l "",, ,d h't:! .... -<;lied 1pQ«(lW-

'" in 200II Iigut~ ft~ II~ upwW .hilb" ~Iil 

"-""'" ~ -..:. ... ;dtn! r.... P''''' boJm:t;, .... wll<) Mi-

.",1Ced I"'it """'!?Ir' ."d ('" ft'(lMj 1I<>u<ing 

A(""""~IJ\lt;>r1".,.,~ 

-., 

" 

• 

• 

''''' ... , ,... - '.. "", >¥' __ ""' ... _.lOO'o<.ot._ .. _ ... ____ .. _-"1U'O .. _: .... 

_ _ _ .......... -... __ ',,'_ ...... I_-_ _"IU:ll .............. 

niched JcM.tt. OQ ~t. OYer I~ fifSl h"e nlonlltt of I~ 

Y~Ar. likely ",n«.~m~ In rin' $lricl<f underwrilinl'-"f 

mQr<-n'!Xnl originlliool AdJllkmrilly. m(a,;'\,r<:! "of 

lalC-5l"i< m<>rlga .... ddin~\k'IIC). ,deh as I~ in*l1lory 

of nfll1'-'flits in foox:k\sure. OlIllmu,d 10 linger ncar 

Ih, rook in Ill< firSI q~arlcr of 2<J12 inllUrt HI, 

C"J1\l!S isJu'n<-: of M U~ gu'ranh'rd by GSI~ 

rtm.'ned onodC:f;ile In Ihe ~($t holf of lOll. Nn"SI<:n1 

wilh Ih,lJ,)", ft;loI.'" of mOl'\~~ ~nginalionl In oon· 

Imsi. tlte oe.:uritilali,'n nI;nlC:I for m<lrlt~ kxlni 1101 

¥u.tranl<'Cd by a housing·r<:!~Ic:J GSlO or Ihe Fodtrol 

Ilou,il\,/! IIdminislfIl1ion- an Unflol"anl jOur", of 

funding Ixr~", Ihe <Ti$is for prime·v"'" m""gages 

Ihill e~""CJcJ Ihec:"nronnm~ ~an $i) .. hm!1 <'OIII;U· 

IItd 10 be ~liallydC«\l, 

Ttl!! 8usilleS.' ~or 

n...,lI llt"m_1 

Real businm; 'P""din~ f"" <quipmcnl 3nd .01"1 ... • ... 

(r'&s) m .. ;II ~n ""n~:d rale of ] Y:. pcrcctIl in lhi: lirsl 

quart« of .!OI2 afler h"'ing ,;,.,~ al a doIobl<-dipl 

r;oa:,on "mage, in tl!c..cood balf of 2011 (tigun: 14 ), 

Th< dowd""'n in I!&S in .... I!Il(nlIf'O'l1h in lhe fir>t 

quaricr """ fairly wide<l""ad aT<lS!l calef"ne" of 

.~uip"""'l and ",n .. :are. Thi> do",I'''I;on in I!&S 

,prndin~ oIoo¥ "ilh Ih. """,.1 ,oftening in indk:.:il<m 

of in .... "'TlCnt demand. ",ck .. ~ur>'()~ of bu,iness 

"nll"",nl 31Id CJlpil:ll <I'-"ndin~ rI.n~ m.y oig.tlal "'!DC 
82 


~~~,,, ... cJt, .. ,,.,oo,,,,,," ri .. ",;l~",,"'!~_.""d'<I"""iI,'I"· 

eoi"&G1~""'g~w"'''''''''KN.t<o.''''''" 

1M<. """J~'l "". iodi<;oe , ..... ""~ mo.ll ont>-N!( 

,of~!(lo"."wIy~:I<I"""iI .. ~If~. _­

II"&" '" hn<row ... "',h mod;t""""'lorId '0"1140-

....... ';11;0, ""' .. nl' .... kMr, I'fl<h 01'1>0 '""'" :./low .. , by tl ... gtM'I'" ...... ",,"""""'" .," <~~.,.,. 

(GSUll~n~ M.: ond r~dio ~I«. 1f>Ol ..... ,1oo 

I ... j"~w(~'.d ""Iy >llgl>tlyftt"" w.o. ~'fIbIolUl!e ... prilSlOOSw."' ... I'lI 'Q 

i<lemiiy"""""'1U II .. " l;d 04 W~""~ KI <>IIgi- lliIIe"""",CSt..,ligiI'" ~ nw[,,,:I<I. In"" 

...... "" .. dy< ... d .. ·""'" ;,,..,,.,..,..,,' 01 ""'Y 

""",~ .... ' _It.. ~ "'" iJ/"''''bxl:s' 01 

1It-lir.q ... '" "","II"j;e>I>j' ,he G$I,- ,' ... ~. ,II< fIU" 

~hii'r.hat ,,,.. GSU "'"!;!" rt'Q\lI/': ",~....,,~ 

n'l"J'<-1, .... loans"~ h any urld .......... , '\II ilfl'8lJ 11r;· 

1~,..8IP'io'Slh:ll.lhe .~n~ ''''' .... e. 01 • ..,..Jit"",., lI ... C"'~ is .. in~"""'" (~. 

".."" fwo,~her~w .... O'!'dIO>""'" in."..,.. 

,"",,. YPI)' ;"","n",. "r ol ... ~ '"~ 01 

""'.,....."t~ (I)i""", ...... od W "' ...... n..,1I":II" 

;""""'''''". i<>I:ludingU .. W ... 1ff fliru~th'" 1_ 

"""""'1.r..uinob~~""\Jrh~, 

f>/ ..... ""~ ,h., 11"-')' 1...:.1""" II'" [1\"'" ,,,,1.I00I< ~lt I .. " ..... otk .. , c.., ... , cooc.n,"","" 'm;, 

ba<t\., .">ling "'r"',....~ I(J ,e<iol.."ioj ,!I-<1IbI .. e 

10.... ",.1 ,.,,." .... 1 ,,,,,e:,, .. obI." .Im:b ,~"'t 

illaiw ch.nSl'~ lIII ...... b«yO<l;.,rb, (0< ct'''''8I'I: ill 

"'''''''''''"'t" .. rloofl Wffl!"'" 01«1 , .... 0wIy r, ... 'l""IIIIy .. 101)' ;""''''!IOOn Ikw,., 

rrll<>'o.d [1IOII<l~ 00 llIe p;!rl ,..r blIs n<~l, p<rhaf'l! 

rrl"led I,) 111e 1,1,,"1'00 in EU!<lJ'r. 

An'rllO>lI"g Albus1 gaw thro~1 ml><h ~I 

1011, in~sllI\tnli" n~nr.,;iJtnliai mu..,ul\'$ edged up 

in Ihe ~rsl quartor of (hi:; )~at. i\ drop io QUII"Js 1M 

drilling .nJ mining mU.1Ur<> " .... pro~ retaiN 1(1 

1110 Low )..'1'd of nalUro] ~as prir<l;. OulSldo ...... the drillil\(l ~nd minin~.ltvn<lll~ irtv'.<lm<nl iocmued .. "" 

~nnual nIl.of 7 p(I'I.X'1Il in lll<~'" Quam't. broadl)' 

, imllar I" ill ... irI in It\< fuuMh q"""er M 2011 

Allh<l~gh ~nandn~ c.)fIdit (ln~ f~, e~ l1'll$ properliol 

h;r.'~ .ased lorn.', Ihi')' "'m~in light: mo"'O\~r, hi~h 

'>ICaII<y ral .... I"", <Q\l1l1\trcoal,..aI <SIal. f'1"'" and 

diflku]( fln.ncin~ wn<iilioos for ""'" con""'~lion will 

likely \\"i~h on build n~ """viIY fill" Ill< fOlTSt<'abl< 

r~lurc; 

--

.' 

.' 

.' 

- , 

:M ,.... "'"' "''' "'" 

An od.liliona! 001"" ..... l~hvu"'h(>loJ( 

~'o""'~Wo('<!jl; ,~...,,,!uityth1l! 

h",,,,,,,loed tmmlh.dod' ..... how-pr>.",;", 

..... "m ~_Itou!;',1y 011<''' hor ""'''W-' 1>0.. 

I(!Wffi" ,,0<1""'''''00 "",,. to...- ~" .. ~ 

"t>oly 13 nlilllM \IOOj<>1.,ldl .,1111. tlq(j~~, 

1>0<1, ....... ..-. 'NI<ir.Io;cl it. II",;, ."~~' w' ",fio".~l' 

iIIIo, .... ~, """'II'" IJI~: .h"Y '''''Y.!sn ","I ,io(>oo-

".MIl' ~'n •• d b)' ,ht dilk"lly III .~"'U' 1 ,I\rjr CU'-

~.-

JIlrt'tltiN)' Jnrtjtm"., 

Finru accumuiJlted In\tnt~n<s in In. fil'S! quaM., III 

.b.>ull~lam~ P""" U io llIe r{HIrth qWl"<, Of Ii:« 

)".' lti~ure 15). M<)Ior vthklo inwnlQri", !UriC<! ip 

lbe firs! q ... n.'t, -;os autonl4<r.l ,..huill <.\<;don' illI'onlorio< 10 .-omfoMabit k'voll ~ntr \IIItura! dl$Mtm dis· 

,UPI<J l!l~baI sufltlll' ,halns in WI!. S1oXtbuildill,g 

~Uliidc' Llf m~IO! vdlid~ modc-l'1uM ~'hal from 

IIIe fOOflh .... Udrtrl j'IliOC<lfaoxumul:\lion. n\'tnH)I'J~OJaI.""l Nlilus fill" mOSI ,nduMritHO\~"'J by !btt'tnM 

lIuf\:Ju'l book·,-a)u< dfda, ~s ,,~IJ ., SIlrw)~ of llri:':alt 

In'''ntOI""),satil(ilClioo _nJ p/:on.<. g<'Iltro/lYluunllhal 

il<"b~re r.,rlywell ~i~td Wilh the 1);l<.'C ()[ salts 
83 


12 MOrn:lar}' IIJIicy Reporl 10 Ih. l;)ogr<:!$ 0 July 2Q12 

I), C." ... , Plllll<II>OI'P!-<" """''''''''' del"'l""n' 

_. ...J __ r"~"""'" im' __ Y. ~m-12 ...... _ .. - u 

" 

" U 

" " 

~ 

----

~ .. ~ ~ .. 

.~Q 

" 

I. .j.' 

, 

~ _ ......... to. _____ ,,,,,,,,-, ........ 

. ...,.1II'l llot_Iot __ ... ....,. ... .-l_,., 

... ____ .. _ .. ...... 

__ n.._ .... _ ......... OGoi __ ""'Iiooll>f"' __ ot __ _ ""' __ IJ'S A ___ "'_ 

~-.--- ..... --....... - ---

.-......... - LL

1

_. J ,I ',' 

I 

H .. "...."'t-._ .. _ ........ 

• 

• 

" 

" 

• 

• 

_ .. _,----,. III ",OJ 

I----. I~ l • 

• 

,. 

," 

i\~le ~p:r.t;"~ <-arnutp per 'ihw!<1T $&1' 5(X! 

firms~ obout 1 pelt'.n' at. sc.~nJ!I)' aJjU>ICil 

~ulf\uly "'1< i" Ih. [J"1 q ..... rter (If 2(111, Fil\.lllQaI 

6"", a.:\XlIIntrd fOl' mOSl ,1j" til< gaw. \\ bij~ rnlJiL< f", 

riflll.\ In Ih, nonf'Mrl<.'ial S<c10r ""'" about unch:llJg<d 

["'m,Ile bish h. ... ~1 s<\''11 in the fourth quarter oflast 

)1:3r. i\s of I"" end of June. [!ri,';lI~~orHnal)'SI' pro-

)«;t,"\ mo.lmurrarnings groI'o'lh lhf()UgII rho end of 

Ih. )".ar. 

The TIIIH) <If OOl"J'llrlllC pmlils to ~ss n~'ional prod. 

UC1 in Ihe ~rs! ~uan(r of lO t2 h",(ml aWlind ill b~ 

lOI'kal high. and ,ash 11m. r.:m.m.,J lotid. ln ~ddi ~)n. 

(he rllli;, of liquid asso:(, 10 lotal ;u,o,:" ",ml;nu(d 10 Ix 

noar liS Iligjl(<I 1(','<1 in molt" than ltJ )"af~ and Ih. 

shalt" (If CIlt"(1C>1lll< cash flow nocd<d t~ <>;Wer m'orrsl 

'~ll<llses fC11Uined low. Again>! (hi, I>a<~drop of ~n· 

mlly .<Irong c<lI'J"'tille tarnlngs and blil.nee Ihetl:l. 

,ltd;t M,nl upgrll<l<'S<:OOl n\J~d 1<) (>utr«~ down· 

grade! lor nonfinan"aJ corporllhOnl., llI<l Ihe oonJ 

dcl"auk TIll: f .... nl'nnnaf'l<.i. finn! n:malned low in the 

firs! h<llf of Ih( yell( The dtlin41.1Cn(:~ .;\lC cn commrr· 

(ialand ,ndu,trialIC&I) loans d« ... taSl:d fu.lbor on lhe 

firs! q ..... ncr o.nd al'!lfoo.thod Ih' (ov,~r end of it. his. 

t(\fICa) ran&c. 

"''I!h ool'j).'lfal( crwit Quality n:mall1!ng f\}bu>t. oon· 

financial finns .... m ~hIe to ,(>rllinuc 10 ra,S( I1.IOIis al a 

~.ncrally llron~ raox In the firJl half of Ih~ )"(It (fi,-

ure 16~ SO far Ihis )·dr. tl()nfinanci<ll commerc,J 

pap.."f (e!') oUIsianJin8 \'ill.lIOOut unchan~d, Ikm.l 

issuanl."( b)" bo:llh in ..... I""'nl· and Il"«ul;~i"'·gradc 

nonllnunc;;il firm, ...... Imn, 0"'" lb. finl1 rOOf 

monlre of II\( )'raf. Oullp<\:ulalil'c-grad< aw~n,.., 

weaktw:d J<l111( in M"l''IInd notlhly furl her in June. 
84 


16. Sd<cl«l '_I'OfIOIII>"" 110' r,""""i", (Of """r ....... -.;,I ro..," ...... :!CY'I>-12 

:1 ____ --_ ... 

.-

~ ... -

~ ! ! + 

lI.llS ~ ~ lI!i'IIl1rll:llUO"lllU :till 

• 

• 

• 

'" · • 

• 

• 

"'" s.....n-n..~ _ .... __ __ no.. .. __ - ---,. ...... 

The tnSlilUtionai scgmontol'lh< ,)'ndicateJ ~or.geJ 

lo.n marktt mnain<d "'lid in Ih. first h1llf ~f lb<.' yO.,. 

",pomO!.lly !upponod wntinued d<llland fOr loam 

from rIO. bank inmlors.1Udl II> ponsioo pI ll$~nJ 

in.uranCf cvmr_mlO' lfigur< 11). In .Jdili<;m, tllr \~~ 

ume ,~- newly ostab!i.nN coll.lualil.d I~"" obllll"-

lio,)/I!";' f.r Ihi:! Y •• ' ha, Illreallysul1¥..scJ lOll ""d, 

MU(h af Ih. b<lI>J anJ I<WI l$SII3JlO: ,,-as n."o<I."IlI), 

u!<d 10 n:finaOO'. ooJ likely ilro 10 .~lmd the m.lurily 

of, dlshn, ""hi, ,,\'On 11lo It",,-bel of l,'ni-·Wm i"ltTc&llo n!(I~II1;l11dinjll1.ommi:rcial b.mklD! orp· 

nllalton. ln IJH, UnllN Slal",.~pandN 01 . b~ pac.: 

10 Ih.!irsI bJf "r 2012 doopilo di:d i""j in I'" holJ,"p 

of l!lfh loans by U,s. brJnellcunJ agtncics of [ UN· 

f'CafI inil;lul;,)nt The stren~h iSCilft" llonl "'ilh. rd.-

... 

-,",",,

-' -----

• 

1"11 

"' 

• 

., - . 

, 

"' " " , 

_ _ _ TOt_r.-1"11Wio ... .,.0.-1_ ""'- .. _ _ .. .. 

o\oIiI. __ ...... S,.'"" -. .. 

....... """ ....... """ """" -~'-("..,...-

livI;L" lali<' number of ballls, "n bal_ncr.iIlal h ... " 

... pont<! Slft>IIgt'. tkmwd w,Ckl loQn, in lhe f'tt<nl 

SlOOS {fIgu~ \8~ Mnrw>'<!, in Ihe "rriJ SUXl$. 

bMk! conl;n .... d !<> 1't'f"!I1 ha"ing tastd both I'I"n .nd 

nl'opri<:t 1.1m.' for (:& IloalU, Ia.r~y in rtSpi)D'" lu 

slrong 'otnl"liri<m from 0(00 bo.nks and oonb<tok 

Itodo",- Tho ,,,,-I<n! of e .. in~ J:""rr lI~ has bo<:n yeat .. 

for tI.t< wd middle·markel (rrm .. Thill Sllid. """"rd· 

i!1J: 101M Su.wy of Tormo or i1lliinc'<:i ~ndi~ 

IST L~'J1'uJsO!l C&I ~1IIfU""'! bHn~s' rop ~f 

fuotis. .. hile ""nlinum~ to trend down gnodu"Jly in Ih< 

February and May ! U,,'t)'$. i\I'<.!AiI! quite hi~h in hisIQr,,'" I<rms. SJ'f<'l'ds \'0 tll:wiy i!.slIOd I)'ndicawd loan> 

h"'" illsol'tlT1:UJl\.-..l ""rne-o.hal "" ok 

IloITV"'inS oondilionj for 5ItlaD bu;inC'SStj s.ner:.!!)' 

hll"t imrfOl'td <lI't. ill. palll f.w yom bul ha>~ door "" 

fU~h !Il\'I'C gudulilly Iban hlll'O I».dilit>n~ fQr IarJll'f 

firms; 1I!OI'roVI:~ II!< <ltmand f(ll" ('1"<dil from !/lloll 

finm appamttly mnain" ui>du,d C&lloam with 

origin:li amounl! (Ii" $1 milh<)ll or kss a l"l'Il"/.harr of 

",hich Ii};dy OOns]J1S of loaM 10 lAllall bwillCSS($ 

"'<n: aboul ul\I:nangro in Ihe fits! ~uarlcr.) Ac.;ordin, 

I~ msulls from surl'<:}'Honducl<iJ by lhe N:uio(kl/ Fedonll;OIl of Indtpt:nlknt Bus;ocss durins Ihe first n.if of 

Ihis WU'. th. fr>lClion (Ii" r,,!tIl ";Ih I>.:>rnw.inll need.' 

Sl~)~ low (fi~u'" !9~ Tho I\I:ll"'1"'nlllg< of n.-;ron· 

denls lbat found m'dil mOrt diftlcuilio IlblIliD lhan 

.i b<(Jt1pIt-. ... "'.Cot.l ",""d_tlt/oOCoIl 

~ .. ,II< __ or''''_orllw~ ... 'II< _lor 1II<!(ouI __ , 

Ii, o....s. '" wooiIMII ...J d<o....,.j (,_ M"",,,,,,,I:oM 

~ t.;.-. 19')1-11)12 

. 

, 

n> 

'" 

'" '""" n. ... ___ • .....,-"" ___ por 

,_ 

___ ...... ___ ............. lIl tl.....,. __ ... ;jlllQl ..... rw_or--... ___ Io<Wb' 

.. ~~b ""' __ .............. .,... ____ __ of_ ,.-0( .. __ __ _ _ _1)' .. __ 01 __ 

_~_ 

> ... F_ ....... __ 1.oMQffi.... , ... SOO"l' .. ... CoIli.,..t. 
85 


14 MOrn:l:<ry' l\Jliey RtporIIO tl>< <,j)~DJuly 2Q12 

19. Na f'OIt'''''l!'' 0/ fin"" .. '~h bom>oiirQ "" .... 1'1J.l-3))2 20. D<linqU<n<)' .. 100 on C<llru".,..,,1 1'<01 ...... "" •. 

I I ! , I 

~, 

-

• 

., 

·;g .. lk ..... __ • .....,_~_ ... 

_-.., ....... __ ~_ .. -!\II:.....,,.,. ""'_ .. --.... _ .... -..-..-.... .. ,.. """""-n.._~---,. .... -...-"-----"" ...... ... .. .so-.. ",,~_"'~_ 

tl\n.'l< monlhs ..... I;.r ...,J Ihol ._, j>X1cd I;ihl",. ~l'<d;1 

IXlndll""'" OV<r lhc neXI th~ !I1~nth, hw. hQlh 

.J.:ciin<d, but Ihey rema;noJ at rdaul'CIl' biph Itvcls in 

til< June$ut'\ey.ln .,IJilio<t, m:tnl readings lrom lite 

STilL indicate that tlte spreiUls d,.1'\,'cd by t{lmmcrcial 

banoon n.wlyllri",naled C&llcal15 wil~ <'rigin>l 

um~unls los than Sl million mnainro 4U11, hi~h. ""'n 

OIIloonl "nh the Ilmnge<l <:n:dit ralings. 

n~ndal C¢Ilditi~ns in Ihe comlll<rcia! 1'1'111 estate 

(eRE) Ittti">r ~.8scd SUIl\e bul >laycd I'I'llIIil"tly 

light ~mid wtak fundamentab. AoxornlllS 1" the Ami 

SLOOS. tome J<.>m<:!1ie banh repomed h:l\ ;n~ <OIStd 

,1andaros on Cit r Io«nund. on balance. • !ignifICant 

numbtr 01 JM1l<SIi<; hanKS r<pomed incrt8S<'l dtmand 

for such l""ns, While nk{ holdings of CR F klani 

oontinll<d tn ""l'Iln,<.1 in Ih. flNt half nl IhlS ye:>r. tbtl' 

did So) at a slcwa pac< than in til< :IC({lnJ h.lf nf lIell 

~"tar. Tilt wtakest $I;\'I1lcnt of CR E biding h.i hem 

th. pocillln lurflOl1ing eonSlru<:IIQn onJ lanJ d<wlopm<nt; Ic)m(> ,)tha !!:gmen!! h ... " rte<"IIll)· eXf\ln,kd 

mooestl~ ISSIIon..: of colllmm:iat murtga,ge-bw;:k<:,1 

St<urili<s (eM RS) haj HIs<l iQcr<ase<!rtt .... tly fmm th< 

kl\l' 1"",11 \ll><tt'\'ed lasl )'ear. Ncnelh<l<S$. th< Jelin· 

queIKY ratc iIIt klanl m e MBS P'><'ls c<)J)l;UUeil Ii! let 

new highs in June. :IS ~m< fl",·ycar IIlan! iss\lOO in 

2007 ~Ith< htiibt \If Ih< mlr~o:1 Wert undhlo H> t<~. 

nan", ~t maturity b«:a~ I'If their hiJ1lt loan·(C-VIIlue 

ritllo& (figurt 20), Whik delinquenCy r.td 1m" l;RE 

loans a! oom,""",i<\l banks improwd ~ightll'in the firOl 

4U.rtCf, ! h<)lrema,f\Cd t:klillro, np<ciall~ for ron· 

slfl1Ltion and anddc""XIl1\entl~n~ 

In tho <<.lfp)Iitl< <"qYIIY mar\;<\, gross ruNic «!Ylly 

ibuan« b) nooflnanci.>l firms was AlIlng in tho fiB! 

1991-:!Q1l 

-

1 1 1 1 1 1 II 1 1 1 II 

" '" 

1"1 1901 tori lOOO ~, 1Il(1O lIIOlI 1011_ 

,r- - ~ 

v ... ·'"" ""' ... ~_-.l ... __ ... ~'...t ____ ..... ..... /O!l;Q1 'llIt ..... IO<_ (,".IolII$/ .... -r>o.;l" .... .... .... ~ll.'!><~_"'_al __ CMI!S .. .. ......... _JO~,,_,.. ....... __ Tlot 

~,_t"'''''_,_ ... .-.. .. _<lQ'''''' ..... h-.r:I-,.,. "" ... ,,--- .--. I'oknI r __ _ _r_~ r~~"( ___ !l:"" 

~ . ... ""_, __ f_~ .. ',_."" 

~-

f'''<lIIonllu of 2012. boosled b)' a ...,Iid ~of milia! 

pyl:olic ~1f",ing5 ([PQ!),' O:lt3 f~r lilt Ii .... qua .. ",.,,1 

2012 ,"dic.tt~ lhal ,rune reJ'llreh ...... and cash·6nllltOO 

m~~rs b)' ncn6nancial firm' I'I'm.!noo I',bu>l. and 

net ~"Iuity i:<sua""" remained d"rll' ncgal,'" (fig· 

Ure 21 ~ Howevtt, ItI' .... mtflI.·rsand n,'W sban.· repurth:un progt'JIIU ....... ~nn(lllnccd in II>< second quart«. 

TIle G\llettUnelll &<tor 

fleJfflj{ Go1'l'rn".e", 

The tkflcitin lhe f,<!enol UniUN budget "'mJ.inj 

~k''aled, Tn. Q~';O"a1 ud~1 0fIN;. rl'llJ<.-1S 

lhllthe dt.1icil lOr fis,:aI)"tar 2(112 "ill I>< close to 

SI.2 trillion. 0. about 7:1: !""",m of ne>minal Gl> ~ 

Such a deficil "''OulJ be a nam)wer .ha", (II CIJI' thdn 

tho,," n.'C(INeJ ow. lbe pu1 ",,-enol ) •• ,-; Ih.:lugh iliU 

~ 1_.U"_,""",,lfQ"'_tIoprtl_r'" 

"ol-),t") lt "·"""" f'I"'~oAa",. _ .. 'I>e ..,. t:;U,,. ...... , .......... "'"'M< .......... ...J IPO..,.",,) 

""""",'!y..-....J ""'*'"'17 
86 


_ ........ _-

~ 

,< 

" 

" 

.-- , 

.. --- ,. 

~ 

~-.......... T .. ~ - .. s:. ,, __ ~"' ____ t)_. _ 

___ 

.. I"bI< .. __ .. ...,._-'O __ ___ ..... _ ..... U_~' _ !O!' __ ,....... ... __ ~ 

~ __ ... ___ ...... Tn _ ,, ___ '·_c...,_ .. V_ 

-

>h':ilT'ly hi~h .. Ibl n Iho,", "-""l1"ded DlIh<f . .. )~l\I3 

""ar to Ih. ''''Itt f Ih<' finanri.al cnru ~od ffl:dSIQn. 

TIN: n.:uro'<I'inll or lite budgel dtlicit •. tr,""lw 10 omIl 

in th~ curnnl filQ) )~~f ~tly rellc,I, ir.c ",a;es m ta.t 

m--<nU<, l\.'Ilbc =1I00I), ,,,nlinu<.os to ft<O\ .... , althou~ 

Ihc~th in vUII.)~ il !>.';ns hdJ bad by Ih. "'indin~ 

do ..... n of .~pansiollllr)· fl"aI/IOlici.'i Cn:l'leJ in 

ft'l'<ln~tClIhc ~o)A. os "~II ~> sum" nw.IKtl~ry 

r<>1rainl in dttctJ~ .nJ olhtt dU<TtIIQn...-y S(l<ndl~ 

"""""" f~.r-", rruipll lnm8$N 5 i'CI';rol In lite fiBI nlll( 

monlh, o[ Mcal2tlll COIllI'>.lr<d wilh Ih<- sam< rmod 

in fi,,<11 2011. 1{~ipl>wl'ft boJS1=<1 IhllS far Ihi; fl,· 

cal Ytir by a ~ riSt mC'lf")Xlral< la.< "'\TIl"'" lhal 

i, 1~lgcly "UnN!llIb1< lo a fOaling bad; in lIN: f<Mml~ 

la~ Ir«ilmrnl 01 sr>m' busillCSl in''C"S m<n~ In addl· 

Ihln. individual ifl(.;lm< ond PdIroU lax I\w1r1j ha'~ 

JflO,'td hi~h<r, r<rtotllng 'O<:ftascs In ",)minfll \tI:I~ and 

!al.ry ,",-..:mlC:. Nenclhd.ss, al only aI!oijl 15'1 per",nl. 

I"" Illllr> f~ f'l>:\'I(lIJ 10 n~liIlnai 'nrome ~ ""ilr I"" I(M~:<I r.:ailin~ for Ihis r.lio vor Iho ~1(0)'''l"I 

(~gur< 22). 

Tolal r.ok1a1 oud.)l nllll'«i siJ.. .... -a)'> in Ih~ ~D! ninc 

1OO!11h' ef ~I<3I.:o!l ftM,,'f HI li\( COII1pa11ll* yw. 

(arl~)'("I'iOO . o..llQ)l "(II: rt<llKl.'1I brlh< "i dm~ 

,kMn ,)f $IimulUHdat.d rllljrrami (i~cludln ¥: 11lt 

Am(riC"Jn R<.«fltry and Rdnl'tSlm<nl ACI "f 21109~ 

Il"I\\\'r p"fm(nl~ for Ufl(mrO ~·mcnll~ul~nct. "n,IIId!· 

ing ""[(nS( ~xpondilUrc~ In iIIlJi\;vn. oUllays r", M~d· 

ic;~iJ iI<l far Ihi, l )'tar " ..... unu:;ual\y ... ..,at arp;l!' 

.nlly r<l\«;1i~in par1lh.impkmmlatlon r4 cos!· 

oool."om'ol measun:shymanyslal< ~~lllfl\Cnl.< 1,1 

mIlKC;rrnding gf<lll,h fOf Ih~1 ~m, InCflulnoSl. 

_"_<Il1' 

- > 

J " 

n 

• 

.. 

.. 

" 

Social s..curily QUI!1f)'J ,(IS( In """ b<>:~u., of In. fir:<l 

~ost4·Ii\il\jl adjlalm<nlSlinC( 2009. ~nd Olllla)S f<lr 

financiallran~ j() l \\~'" booru:J hi' lilt 1I:" .. IIr.II"," 

of th< (~I'<-,(Icd 00Sl of previ<)\llTro hkd Aostl d~ 

I'l0tJ3m II'8DsaelJMI and:lll ,"e~ in Ml oullays fot 

deposil i"""",,,,.:' N<1 ;"I .... Il"'rmon'" incre .... d 

mQ<\mud),. rtII.aing tho rising 10,01 nflh~ fed • .,,, 

0.' 

A, me.:tiur<d In th. D3u<m.1 illt..'<1me OlId producl 

orolU"t. (N!I A~ ..... 1 federal e'llp.:flJuurO" DO am· 

,,,mf'li,,,,"nJ BI"'" 1n''tSlmcnl I"" pan or fedcr.ol 

'pend"I, induJcd in IboCilicul.li"""f GIlI'- (dl al 

." annual r-.lc <If cl" .. 10 6 r<rc<nl In the lim '1." ... 1., 

(I~"'" 21~ Ddt"", .pendinB. "hidll.nlh I." br:: ,.,,,,hc 

(rum ~u'rI.r I" quam,. <.'011\""'1«1 mOil: than 8 f'<'I' 

a:ft~ ollJ nondrfem: ... P"II:M"" <dgcd ~""""!f 

FMend d. 1It held~' lbe rubl"'''''' 10 abo"l 7~ r<" 

cenl ~r namino! QOP in lb. """",d ~""r1c" or 21111, 

lV. p"I<<nI"Jll' I'QinI'l hiP<r lh"" alllI.: crul of wi 

) ..... (6~"'r< 14) T ""'my iU<.'lit'n< p ... ll}' "",1"ooJ 

(0 bo ".n rea:iwd b)' in''''A'''''' nJ~~ ... p( d""' nd 

II Tr=ury .oet""", sucb as bid -I(,""""", , .. "" an<! 

IndiM.'! bidJinf, nrtio<. ,,~'" ",ilbift Ihci, ruAaria.! 

""'" 

\ 1"Iw ~""" of,~_WA I«I;'( 

1'I< _ _ ""' '''"",,_ b).pJa!,,,, <3$It'''''' R.or..,"" .. P""""" "'"' .... _IlI<_~. 

(]( k_.., !hdo __ "' ~""" 

_~ .. 'h< r«l.. Ibudr« . "" ........ I_)TO' 
87 


16 MOrn:lar}' IIJIicy RoporIIO lhe ljl~D July 2Q12 

13. Cbant< in ",J! ~""""",,,nl .. p<Ildll"" 

'"' ~lUIlplloo otId inv...unen~ 1OOf>-12 

--- .-

s... ... _ -u 

Slale and lll<lllll""tfnmcni bud!!"I' """:lUI !Inuned. 

bul 0, ..... 0111 6scllllX>lldiu()f\S fM lbcse ~",""""nL< mly 

be doIIly imrrovinc.. hi [WI;."I .... I.I. and IO<>iIla. 

I'<:<Cll'U ill'P<"",d III inm::I>I: "'<ldcrl<leiy OWl lhe ~rst 

half of lhi. }ur C""M lIu'<3u d~la ind;"'l~ Ih", 

~I.l. m'l'lll" caU"'I.",,, rose: 4 1""""'\ in lite fim 

qu.trt<1 ,dative.lo ~ )'.ar <IIllier .• nd an«d.)(aI .. iIkoct suggt$\$ tbat colk<:lions duMIIJt Ami and M:I)' 

"t'" wdl m~ ntainttl . Mcm:OVtT. vnly a few SI~I(s 

rqmttd budgl'l ~or1falbdurini ft5<:t,I2(lI!(wh;';h 

.mlc:d ~n Jun.lI!;n mo»l S1ak'5~ Ttt<:inlrI<Mmcnl i> 

1m .viJ.nt at IIx: """'" 1",'d. wh.", propC'll)' 11.\ 

, 

_r J '-,--./ 

'1111"'1111. I" II' I " I'" 1 ,,1 1111 !II I 1'1' ,~ I'm 1M:! ~ !Wl 1011 

• 

• 

• 

• 

• 

• 

~lk_"""'~NlI .. " of ,....· ......... ""'""""'"',_"" 

__ .... _,......IW'!_"..Q< •• TOo-.-"'lll';<r. .·_ ................. .. .. _ ... """ .... , .. _ -_ .... . -s ...... ......,tnm. .. .....,~""- ___ .. _ .... 

receiplS- 11>< IalgcSl SOU" .. of hu ",",Mr for Ih~ 

¥O"<rnmmls- wm rouJhly flat in 2011 and < ... 1)' 

2012.ldcclif\t( Ih~ <MIl"uliing dJ«'IS nf Ih< .. rl icr 

declines in home prim "od incl't:>StS in pro!,,!TI), IJX 

rdlo£. ~l'tOv<T. fcdmd:lid 10 oolh ~al'lUld J,'CaI 110"-

'''ITlmcnlS It.u """Iin..-d as Slirnuhu·rrhlro vanls !tll\"< 

b.:en .tm",,1 rompi<lely pha.w.! ou~ 

On~ of the "1I)'$lhal ~lJle IIIId local !!'>"crnm.nlJ 

h:1l~ adJm<S<"d Ibtir lilth1 ~adgl'l $itulIIl~nJ bal I:w:r:tI 

Ihro"i!h ~ulS In lbe;, mplQYmtllI ""d OOI1$I'()<;llon 

'l"l1din, AI'Icr s!to:tLJing';"'lw ~I an aw''ll~ pat. of 

19,0(1) r-er mQIIlh in lOll, 111<1' !l';lI'Cfnmrnls ",d",-'Cd 

Ihdr mj!k'ynttnl Q\(T tile filJl half II( lhe )"<~r ill a 

5"'''~! ~ b)i trimming 3.11ll,iol;ls ~ monliton ~"''f­

. IIOW<"V<:I, lui "~nSl""'1ion ~f'Cndilu1T$rdl 

sh.rrJyin Ih. I,rot q"~rt.,. an .. haviQS ,'tlged dO"'n in 

lhe I.llcr hlllf "f 20\ I, ~nd ",'3.i1aN< in!i>nn,lion<lll 

Mmi",. wnstruo;\ion JJ'<IIJinglhll>u,lt M"), pGonl.S 10 

e"tuinu<:cl dttli"" in !'<WII nwnlM Tile d<'tmual in 

t'Itlploymrn' .oJ "<'!\SIru'lioo"", <liJ(nl In Ih. 

lIureau of Ec<,"~mic AnllylU (ilEA) !/Slim.lt r~! rral 

SIQI. MJ loc"l'I'rcb:ll»S. ~'bich fdl~"1n annualillto 

of 2),i p:m:nl in the fiBi ~uall<r. abQullh. lam. r;u:< 

as in2011 

GfO<II i5su""", ",. "''Ods b)' SUlI<'l und m"niQ~il"" 

pick.d up in lb. StOOftd ~"'TI'" nf 2012. emlil quol;ty 

in Ille !lCCWI l'Onlinu,'tl 10 Ik:lcrior'lr i)\'Cf Ih~ fiBI half 

of Ihe)'<\!ll lmiral~~. cmlil laung downs ... des by 

M<oody-, n"';wlJs.."";'''esube;l.nl':.l~' O"I~ 

uwr~ J.nJ CrNlI dcf~ull sW'nICDS)in""~ fill 

mUnicipal Mnd. lOS< on nOi. YlOIdj on long:"lorm Brn-

<1111 <)bligJtilln m"~ipal hoods .. ~",.bQu1 unchanged 

OYer Ih. fir.!1 balf oflhq~ar. 

TIw- ra al Smlll 

EzII"'" ~N1 mlwrs 

]k)!h r<al ,.,;po,I' ~nd IffilMU ~ motIcr:lldy in Itt< 

ItM QU.Tlor of 2(l1~(figu", ;>5). ReJl¢.'l/lOm ~r gOod> 

and ",rv~ IOseat an ~nnual ra!~ ri (I, p<""n~ jUppoTl<d b)' r<~lj\I<\y Sll\lng f<)rcign ""~"""'mic y.:mlh, 

Exp.ll'1s o! servi= RU1<lmobi\N" rom]llll<rs, and .i,-

mft rtl'*ndc<i rapidly ... hll<lh= ill' ronwmcr gooJs 

dccH[\(d. Th< ris<" io CX]lOI'ti was p.1'lkul~rly SlrOOg IQ 

Canada and Me:o:iN. D.l~ for April and M~y~¥:<11 

Ih.ot t~p<><li ,'<lnlmued 10 N< .1 ~ moo.rat. pa,,, In Ih< 

"-""'<'od QWlrtCt. 

~aI ill'l[lOlU of gQOI!s ~n6 $t!",iu, ~ • rdlli .... 1y 

modes1 2~i I',,,'''nl in lhe ~rst q~~r1", Idl<ctin~ slilIotr 

gtO'fI1h in U.s. «~Mm,~ activily. lmport! of SCfViIx~ 

~utam.)bil~ alld ."mpllimroao ~~iti<~nlly, "hilt 
88 


15. o..~ ,n .. >I io'f"IU 0IId <xporU" lOOlk 

.",J ...... l< ... :!I)"l7-12 

---" 

" 

, 

l...-' ._ L-- __ 

"!001 200.II ~ .'O!I~ )'III :!oI1~ 

Ih("lf( of r<lJOleum. ~lftr.lfl .• nJ ron.Um,'" ~.:oodj fdl. 

Th .. ru" In lmflOMS "":IS bl"\>lilly bas<d iICro>S m*,," 

Ira ln~ parlnen. wilh imparl! from Jilpoin and Mm .. ", 

showing pal1K:ulali; 1t1\1Il¥ jIfOWIb. April and Ma)' 

dAla SIl~gc;1 Ih.1 imp«t grO\Ilh rock.-d up in Ih. 5<0-

(\tid ~uan(T. 

A~!.IFIMr. nt1 ~porlj made;tSlllfIIJ ('IISI1~~ro"l,,"" 

hulwn of (lQ<-lrJllh or II"'f'-"nlaA" roinltO real GOI' 

gnl"th in tho fiBt quamr. 

!\fler iocttllsinl •• liitr m Ih< )'Car, oil rri<"c; I\av. su~ 

S<quenlly faU ... b .. k (figurr !~). Ovtr much 'If lhe Il~ 

quart<f. an im!lfO""<dOlltlook r,lr tho gklbal «<Inomy 

and IIW1""J~ \1C<1p(lb,ir;;lteO,M1l m();lt nOlilhlywilh 

Iron hdpeJ!fAIr a run-up In Ih_Ip.l1 prj"" of oil. 

"lin lho IIrrnl hcn~hm~rk avtragon. SI251"'r baml in 

Mar~h. ~b.lul $15 ~ ,IS lanuary ~'~rag<. ~,n<. 

1ll1d·Marrh, "",,~ ...... , oil I"1"'S haw mOIl' Ih_n 

rrlr.lo:«llil<i. ,""lier gain$ amid an inltl1sik~li~n or 

111< m~~ in [ uffil'O _oJ in<"rel<Std conco,", _"-.r 111< 

slrrngth ~ cwMmiegrowlb in China. An easm~ or 

go'O\XItilicAI I<nsiolns an,\ illLTI'AStd crud. oilluppl} 

produclion by Saudi Arabia I\J.s I:-«-n running ~I n_.r· 

ttwrJ higb kvell Mvr al,,) likclyc.)nlnb'l1~ 1\\,/10 

dc.:h"" io oil rri«.\. AU "'IJ. Ih. [l<K"C of IIrrnl h;ll 

plun,tlJ S2S a ~",,1 fMII MArdi 1,\ Iibo.lUI S)(I)j>.."t 

b..rrri in miJ.Jub. 

rn.. ... <>f man~ n~nfucl c'QQ1Ill,>dilk~ fQllo .. ~d a (>.lib 

simililt I" ,b;ol shown by<'>il P"C01 all>o" .. iln less ""Ia· 

t~il} . larly ill 2011. C\)mmVdily )lIi<<"S mIlitll ai ~baI 

,'Wnomi, prospWl and ~n~n<1a1 ,,,ndiIKmi improwd 

-~ .... -.- '. ,. ,. =-1 II .. 

'" '" • '. • 

" • 

)I . .... r.._ .. .-, nt"""""d"'1'0''''''''' ___ ........ -_ ... ..... -- ... ~11) .,_~_ :»Ill"O<_ .. __ •• _" ... ___ ~I1. 

"'._ f« oiI. " C--",!, __ 11<_1 

-~-

Mi ~ilh • Irrnpo.>rar)· >IN":"",n'l.lf SIn.""'" '" 

Eurupil, 1! ""~ tt ;aS \l1,h ~il rrites. bru.<h.-r commotlil)' price! feU in 1110: scwnd ~uar~r, rcfIe,;j,oB ~rowin~ 

pesimism I\'gafdin~ f'I"OSr«" IS for 1M gIob<ll <CMCIIll': 

l'r..". for non-{oil iml'l".J goods inmas<d k;,j. 

l/un 'I, p:1\~nl in Ihc lim ~U~"Ct, "1111 IIW mw..'S1 

I""'" I.lf jnq_ase likely ",n"'ling tbe lawd dr""lS of 

bo,h Ihe "Wrt<",lion of Ih_ doUu llnd Ih_ drrlinf In 

ooml"llool1y ~ th~1 r>CCUrrrd Il0l0 1;lSI)'Cllf 'wln~ 

IWI the IIC<OOd qu"rtc"f, imJ'VI1 prier Infta,i()!1 ~l'p<Jrs 

to hM mn.m_d sllWIICd.o;(lnsiil.nl v.;lh ~ "'rthel 

awm.-;"Iioo of Ih( dollar. 

largtly n'fi«"ling ,ho run·up III oil )"IIlCts.~rly in Ih_ 

Y"at, Ihc IIOIIlmallrad< t1tfJcil wiJentd ~il(h ll y In ,h. 

~rsl qu.rlCt(llgurt 21). In addition.!\S tho: nt' InV<"St· 

llI<nl lll«>m< billMtt 'Ol11lnw:d 11\ d«lillC. t/l( <U11'<O\ 

_Wl"nl d(fldt tkttriol1li(d from ~n ~nnlta!lI\'t~ of 

547U ~i1Ik'n in 2011 ~ SSSlIboU;"n III lho ~r" q\J;lrlrr. 

!II 311> re,,,,,nl ~f GD~" 

The ~"anci<ll ~()'M (hod p""iJ. I~ ~nancl.g.,r Ih~ 

cOUII.nl "o:'lUnl tldicil refto<,rJ III< ~ trrtllbln 

tin.ncial mark., "'nlimrol $nd in feSt'rve ateumolation 

l. 1.,m,,""B£A .U,milibtotiu~i\o~ 

~"'!'I)"""""""""''' oNcfoooJ,IIo~_~, ","1<ol<~_'1.'''"""",,,''''_01 ___ .. _ _"" __ ~ .......... I)_oapoIoI"",, .. 

... """nll. odo.!< ""tol .... """ .. ...:1 ................... Mol 

"""""' ...... f"'I'Io-I ... r...""" ...... 
89 


19 Mom:lar}' Policy Ro",:m 10 lh. lvugre:!$ D Jul)' 2\)12 

_ .. _till' 

""",-"" ...... """"",, ___ ." NIl,Q1 <.I!I'o_ 

--~ ..... ·~"~Booo."_~ 

by cm.rgill! mark" =lI<1m;<1 (EM Es) ConSlSlenl 

... lIh 3 Icmp(lra!)' iml'fll"em'nl in II\< Ion" of lin.nrial 

m"rk~IS in Ih. fil"$( q~l1er. fortlgn privalo 1 •• <Slars 

sk!wtd Ihm II<! pu"'h.~~f U.S T!"a;urYJt<."Uniios 

~nd I't"luiOOl n"II1ll"'h~>tSofU.S. ~uiUt,. al1hough 

lhoy t.'ll1inutd (0 scll ;,In.:r U.S, h,'nm (figu!" 2g), 

!!(.oW(".I:,. Ih.1tnlaliw intNut In f~mgn risk ~ilt 

aha lod ....,.ty in lb • ." se<:ooJ 4u",ler and fo", ~u pr;'''I< 

;nw<w.ufto".d "'"tVl'o:<I domJnJ fOol" U.s. TIU$IlI)' 

.""'Uf1 linand 1.:", <lemanJ for mho. US '.,":uriln 

U.s. ;n",gOB' demand fo.IO"';[(II ..... ~nlll:' VI-.. HOI, 

"" n.~ ;n lhe flrsl quano •• !>d the .a.ty part "I lbe 

28. N<l (om", JlIII'I'~"" ,0( U,S. ""unIi ... 200&-12 

• OIf""''''-''\'' r~_ ... • ""· ... ,..._ .. t·S,T""'""l:_ 

'::- ,,*,,_OC_I'1 .., __ 

III III II I' 1 

_.-~ 

~ 

~ 

~ 

-

,. 

,. 

~ 

- ". ." ." 

"""""'?IlI«~,S"""""" __ """",,,,_,,,",, -

.... .. ~-_ .. c_._ .. .-._ 

lI''C<lnd quaner, b~llhisO<lI"""'" 'I(HII:lhcl~"r'" 

.!<'!UU" ;n"'''~ ",Iali", lonrlsaksof fo",ign !«ruri· 

1)Oi in lhe f""rln 4uart.r of 21)1\ (fig~r.: 19~ 

Inft(IWJ [rom r""'ll!fI olfll:ial ;/Illtiluli,uu Il","$lh-

~ncd in Ih. ti('jl 4u_nc, !Ill <Rll:rJing markel goWfIImenu boughl dollars 10 c~unr« ur •• ard rmsurc ~n 

lberr cum"";",, "'''''lItn~ in i",,,,>lJfIl """,umolaliOll of 

dollar..d.nom;natcd m;er',<:J,. Vlh;"h ~"'Ih"" ;n,,,,,0:<1 

in U.S, St<;uriti<-. ({leU'" 30) P'4rtial d:l1n for lbr A"COIld 

quan<r,uwsllha1 [On:iJPlllftid .. tn~O'fI)'''''main.d 

~Ltoni de,rilt ",n<IfII:J d"nar aPl""'"t illl~\n "IlJinSl 

"~1Ij! mark.1 '-"IIrWII'it>- Us. o~ii."ial ~:!S<u "'~,.. 

I.ml. 55! billi"n IHnuw during lite filll ~ual1<f III 

dnrwinp o~ ,he F.,Jenrl R<:SCM'S doU~r """~ lint! 

"ilh lhc EuJUI'<"OIl Cmlr:li Dank (I;CI:I)Md Ih. Bank 

of Jaran (ROll ,n,,,, p.,";ally rq>aid 

TOIalU-S. ftl:t IWti<m:>l $>O\'tng IhaL ~ Ihc !la\illj! ,If 

U.s. oolGthollls, bo~n,-~ and 8£"tmmen", 11<1 of 

d<rn.'cillion cho,...'S remains CJllrtmdykM' b) ha.· 

loricaistanJ .. dj lfij:Mn: 11). Na nal,on:ll 5:I"ing fell 

(1'''''' ~ rcrg,~l t1 ""minal GOP in 200610 ncpti", 

1 pc""",t in 2fffl. aJ lhe f"""lIll>udl;<l deftcit widml'd. 

The n~lional5l1linE rak subS<.'4I11:"li)' ill!.Ttw 10 nnf 

~ro, whm" MIUlIn,'tl~Qf lh" firsl quarter o;l201~ 

(lhe !at.,1 qua"", fon b;en dill" are "'allabk), Tho 

.dmi .. fialness of Ute S:Wing ralt O\\,r th~ 1'111 MLplt 

of)~ I"H"", Ih.oll'~lill.ll.rr'''\i of a lliIrrtlll-m, in 

II\< rN\tra) boJg<1 dtficilliU w.rc ~fMmin:iJG Dr 

n ~<llJ,S , ~ of ("",w. >«IIrili<>. 21'080-12 

_.-

.. IIIIIII' lllrll-

, . 

• 

• 

". 

.. :OO""IW -___ ." .IO_ ." .. __ '" .

-"' 

__ .... ~ j _ ..... ,""'-""" "" ..... - '-' '' __ -" ..... 

.. _ ......... ...,..- ""_"-"'''c __ .. 0:-........ '" 
90 


30. u.s .... 11....,iol inflO'O"l. 200II--1 ~ 

_ (- .... I 

L~_ 

........ """'" 

_.-

_l ~oII"""'_ ,", Io.!<"~-""""",,_ ""'P.-_ ...... _'"'"'I' _ _ *_Il<W>. ~- ~ .. ,-.-.. ~ 

ROO ~ OOwn"'~rd 1II0W"IIlCni in Ihe rri''llI< saving IlIt~. 

N'tion>lilOMng. wililikdy .. main l<)w litis )~ar in lighl 

<'f II!< NnlU1l1in~ !alit f<<krnl buclg;:t okl;.,.it A porI"'" of the d.-din< in fClkral SlI\'inp relat;": 10 pItcrisis ~"'~ is <~Iic:aI ~nd _Id bt C\,..-.:I«I 10 re'otlSC 

allil<: ,'Conom~ rtcOVrn. 110"'= if I()'<I' Ic:,"t\s Ill" 

n.l!~.r ,""ing I"'rsiSi (IV" til<: liloX'"' run, Ih'Y"ili 

lil:dy bt ossocialN ""th both low ral"" of "apilal\"" 

malion and h.3'Y borro<>inll from lIbroaJ. hmll;nB Iho 

flse in the 'iindard fli"\II~ 6.» U.s. I\~,.knl. d'~r 

lime. 

11. N«o>,·,,,,.I!.l92-2Il11 

-,,-,.., 

....J......l.." "'''I " " I llot'l. 1010 :tOOO .!($I _ lOll 

'«". n. "' ~_"""'''''''' 10 1l\l1~_ _ _ ... . _.. __ 01 ,.-I0Il ror. .. ___ _ ,...... ....... .......... '" 

hot> ''-''C--. _oIV_..I-'. 

'rllt Laber Markel 

l:.illph/)'lNfIIl unil (lt1~"'rlll)" II'NI 

Labo, markot oondi(ioa, remain "d. All .... oM"SlllJ! 

1/I5.00'J jobs I"rmonlh in Ih! ~d hJlf of::!OII. 

rri'"3I' pa)TVIl ontl'!oym<m saini im:"",,.,J to 225,1)1(J 

job$ 1'" IMIIlb ow, lilt iirst Ib!'Oe month. of Ih! )~a, 

and Ih'"1I fell back to 90,01'(1 job$ I"'" month (M." lho 

past th!"to: moa(hs (iigun: 32~ TM aPl"'rcnl , \(M'ins in 

th. pace of nCl jobereahon ma)" ha>~ been ~uJl8l"fa!cd 

by iMu... ~1'led to in\;OES !II lb. "'..alb .. and 10""'" 

sonii! adJult"",nt difficulues ~".,.' "al<..'<J ,,"'Ih tbe timing 

of Ihe sh.r~!.i<>b I"""" durinj! !h. """",,;011. ~Io",­

\lV<!", omp\<J)·m.nl pinJ during Ih. S«<lnd bolf Ilf last 

yu,. and IIItll 1ht .arly ron of 1lti. )~a, may haw 

«I1'u«I .... m< <.I<..h-ul'iu b"ing .... , tu, 1""1 vf 

=r10)~rs Ih 1 a~>'<lypami their woMon:d during and just afu.-r th. rc..-.ssivu. Th. rtO.."111 decckrlllioJn 

in cmriO)'monl may sugg..-st thai much of thIS C3t.:h.up 

hai n,l'" t.a\:on pI~ and Ihat, C\llIS<."\ju<n!I)·, n:w",· 

'apid gains in ffilMIl\l< tlCti,ily .. ill b. ""Iulred 10 

achieve ";gJljf",ant [onh .. illCn'OS<"$ln em~monl 

Ind d"di~ 111111< U1\C'fnl'k>l'monl rato. 

n" unom[)lo}mrnl ralt. !lHlugh d""", from around 

9 ptlrenl \liS! suntmer. hal hdd about flat 01 8' '0 pt" 

tenl silK>! oarly this }""" and """"in, .M.d re\ati>'< 

to Ie,~ls oincr>'<d prior 10 Ilit rt<knl I"I'<"<'jiijon (tig' 

Ult )3~ MOrNVcr_long-lemt un<ml,loymonl",SO 

I\."ll\alns d"yatw. In June. ~roufkl4IJ f.'C"",nl of th~ 

unempk'ycd h>l!l )x,:n "Ill of 'M)r\; for molt than six 

m,)nthl (figure 34~ M.~n"hik. th" W>M r,"lt« [llirl..:;-

f'I'Iion flIte hOll Hu«u~lcd amulkl:lkrli kwl sc far Ihi< 

year after h.''',"~ _d d~,,'t1 2 ptrccnl.gc poi"" 

ImOO!2007 

-- --, 

, lOOO :tJoJ .!OlI lOO\I .!IIIO lOIIt .!III! 

:;nw no_ .......... "" "_ ........ _ .lOll. ""-"",, "'-"1_._"'_-
91 


2(l MO",:Iar}' ]1J1icy RoporllO th. C;lngrwD lui)' 2\)12 

, 

, 

,. " " ~, 

_ .. ~_"'...-Ir_"-"",,,_lOll _ .. UOoI._ .. '_"-'" -

" 

"" 

OIher labo:lf markCl inJi<;aton ""R' consis[(nt "ilh 

lill!.! th.nrc in 1l~m1II.oor markel c.1nuitivnJ du,i~g 

the finl holf cf th. yur. lnitial d.im! fll< un.mpkl~­

ment i",ur.ln~ .... o:rt not n",ch ehonF<'<k .'M II<It. 

altllough thci, "'~ .... eI <J'/(f tb. fiBI hlill eM the 

Ju,Wlj )Q..'(f tb~n in lhc~nd bllf "r )111. Mo.uurt",c JOb varnnc"l<S <dgcd up, on rub"" .• od hOll..,. 

holds' 1ah.1' milfk<l C.lr«I~liou, J.trg.l~ "'''''TSlld Ih. 

st«rdrl~r!ott\li,m from laillUmmer. H(lI;tVl'r, i"dbtors of ~iring activily ,,,,,,"ined Jub<iued 

G"i,., in l:ibor rroJuClivil~ !11M «)nl",ued 1<> Blow 

1W:nUy f<>llo.iinlt"n oulJ.il.ed illl'f'CaS< in 2il/)il IIfId a 

-

• 

• 

• 

" 

_ .

Si'lt- no_ ....................... J_ lIIl no ....... .. _01"""~_ .... _toooo 

~"'II_ .. -- "' .... '......-. .. ,-_ .. ,-_ ... 

wlid pin in 1010. A=rdin~ lQ lilt I!lOSl rubljs~.J 

datil.. (}IlI(1llI pa 11011/ in Ibr IWIIfarm b1u""<S!ICC!'" 

l"QSO jusl v, rcn:cnt in .)(III and doclinro in Ih. tint 

q\lllrl'rof 2012 (fiJurt)Sf . .... lllIo\IjIh Ih('jt dlll:t(an b< 

wlatile frum ~u~rt.r IQ 4u~rt',.. Ih. modtrJI;On in productivily ,,,,.ilh O'Vl:f Ihe J"'SIIWO Jun SUU"Jlllh~1 

firnu ha'" been .dding ""r\:en nOl only 1<> """I n,;n~ 

production n .. cIs btu al!O.110 ",Ii ..... J'fI'lS"'"'" 011 I~." 

~.';!I'ng "'"tfo=~ ,,!I;ch "=<"1 bod Jh~'rlyd"ring the ,""ssion_ 

ln~"'ases In h"u,ly romp!;nsalion ..... mln"" lO!lo 

ItSlraintd by Ii><: ~ry ... "aI:: rondilion of litc IaIJor 

~ Tbt 12-lllI.'nlh chanll>' in tlltcrn]1lo)'tnt:nt (()!l 

,ntk.1 (01 rri'"alo induslry w,,,,1x1'S, hkh m.OSIln'i 

bvlb wa~Md Illt CO!I 10crnp/(»'<f1 of ]'ro\"iding 

bof!dh hIlS b«n aboUI 2 ]"1(="1 '" I ... ';nc< Ihe <Ian 

of .!009 aI"I« :I"'~,ol )'tarl <If il\l;'.""." in 1/1. neighborhood ,I{ 31""""1 (flS"f< 16). N<)tIlinol"""'j1<nl>3lion 

pcrhour in tllt lll)Hf~rm ~~fI($S~VI" ~ lIlCastlr< 

derl""d fWfl1I!lo\abtl!''''1II1po:nsat;'''a ""'. in lilt 

NIPiI also <.k'ttkraIN .igni!icanlly C\'Cf lile P"5I f~w 

)'UB: lhil mtasur< roll: jusl 1'.1 ptrctnl QIot, Iht )our 

'lIdillj! in Ihe first quarter of 2012. ... ~IJ below III.: al-'<tagt" illCl'<:!l>C ofabQul (j1<Mnl in lhe ~nf1 i>:ftII'C Ih. 

r=mn "m;limy, a.~r~gc h<,urly e:.rn;~1!" for 011 

<mp\o)n-s- Iht li",.liosl me$Uf< of w.go d(\t\(>pmcnll ruse ~boul 2 p;:m:nl in numinalltrmS ()Vtr th~ 

12 m~nlhHnJln~ ill Jur)e. Aerordin8 10 elIi:h of th~ 

moai!IJrtS. pins In hc~rlycomp.'ll$Ilion bil<J to 1;,,,'1' 

up ... ilh i!)Cn"ll<1 in ooltjum'r pnc<'i 'n 1011 lind again 

In lhe hrol qu.n~ of Ihis ) ... r. 

Th. eh'nl!" in unillabor cost> faced hy firm,..... 

whl<h m<;,sures Ih •• ~I.nllO which nominal heurl) 

---

1<",,- 1' ___ ,....,."' _ -.,--,..... . - ., .. __ .... _"" .......... -.. - _ .. .. ""_ ........... JW"'l s..un ~"'t-. _.I-' ... _ 
92 


l/i, k .. " .... <>I'<nl.~,"lwlvrIY"""l"""'I "', 

;w:!-12 

, 

--"" ""_ ........ 'r .......... -,,.JIII'1l1 r._ 

_11'<'tI. ..... ~ .. 

....... ~ .. ,l .. __ " .... -"': ..... .. _- _ .. .... _n. ___ ..-"",,,,_,.,._ --'" 

_""'_""_ ......... ., .. 1'£1_"" ..... ---"'-,,"- S<un o.,....."lot«._ .. ~_ 

coml""'sat><m ri"", in ~1J)CIU of labor r~""1i"I)· 

n:m,Lnro OIlbdutd. Unil I ..... rcosil in It." ()llr~rm 

OO!IIId; ;0,.·10' nlSC I r<""OI ow, lbe ytarcndin, in 

III< h'$1 4uo,lI<I" of 21112. (h~ lb.· rrt«din, lear. unil 

liIbo:r 11051$ i~;1)<J 1'1 "'''''01 

Consumt, prict inllillion mIl,-..:l,J".;n. ~n nCI. during 

IhtfirSl part M 2012, OWrall f'CE pnc<s I'll$< ",pidly 

in Ih. ~~llh"'" mMIM of lilt l"a~ rrtle<:lIn~ lo'J!< 

inm~ U\ 'lil Llriu~ bill inn'lion lurn<d ~ilW1I in lilt 

spnn~ I ~I I r~ rn(\rr than n'VtrSO\llilrir <1lrli<f 

rtllH.l1' T~ 0'0",",,1 <hMn·lypo:: PCEI',,<dndtx 

incmt5<d al an ann~a1 rlIk of1lb.1U! II'; P=""'OI 

btllfflo IXwnImWII and ~ 2012. oomJ'llrr~ 

wllh~ ris>< nr2'~ jli:KcnlllWr 2011 (figu~ m. E.Wud· 

illj! fOOl! and C11t1X). OQo,umer Ilf'om cos< iI1 a rat. \11' 

~b.!uI2 1"'r«111 O\ell/lcli!101 ri....,moolhsM II\r )'Co11. 

<'IS<nLWly!br!a1D< Jl<I<l' 11$ In 2011. In ~~JILion!o 1110 

Qtl .win. in <1"ud< oil rrictl ,n"r Ih< first half of lilt 

l"ar. f\\(lotS<Mllrioolin); LO low oonsu1l\tr pri« ioft~· 

1.10 Iml )..,ar htdu.k tlli: dro::I<1"alinn .If o(\tt-<lil 

,mporl priccs in Inc IAlI<r pa,l (or 2011. fIlbJuro I:\b,)r 

""IB OlS\Xc,ued wilh ttl< ,,<ali: l.bot m.lrlrrl. "",d ~I:IbI. 

n~lj(,n Uf'<'i'l t'On~ 

COMUm<' rn'I~Y /Iri<X-s SIII1<d at ~n ~nnUiJI rot. of 

0"" 20 prn ... nl in II\< ~rJl In"", monLh.< of 201~. ~. 

high<;r eOl.lS r..r <rude olil ""'rr pmo:d !hl'llu~ 1(\ toSOline jlrio.n In "rrl~ Ih. nailOn..J..m:rn¥c r<io."f rot 

j1. Chao,~ ," II>< <ba.,-I)'j"<' rue. indcl. rot 1'""<"'.1 

...,...""'pIKMt '~r<tl!lituJn. 200fr.I~ 

--

~. 

_ !001 lO(It !IIO! :'010 )In :!OI! 

p.!(ltin,-ILI Ihq'umr .I'!'f'OOcl><J 54 [l<T g.llI(1n \lJIC( 

Ibm. cruJe ~I prirol hal'C t .. mblo:<!. and psoJine f'!rim 

hal': ~linw ""ughly in li~ .. ilh(;l1ldc =ts. 1Il.m> 

(han m'mi", the ~di« ,un-ul\ Consumcrrrl«' r~, 

nlllU,..! Sou ~ung<d (Wt' lh" r.rsl fiw IOonlhl ..". th~ 

)'tIIr ~f\'T r .. llilll! la(O last )~3r. Ihis drop i! .I!ribolabk. 

01)<11$1 m PI'". (0 III< un.« .. ",milbly "-.. rm Winlcr. 

which n>Ju,,,,I d,m.nd fo>r nillura! ~t Mnre " ,"'\llly. 

spill prices fOf lUilurttl ~M 1'<: tUloeJ upas po-oou.:-

lieln n~~n (111 bad, hullb(y liII ... maio 'lIll!Ianlially 10,,"1" than lhey ".., .. Ia>t $Umm<r. 

COOiu!l1tr fO<'<l pnC<' \n~alioo hBs ~Q\\"d nolJceably 

50,) f~r tllil }"ar. s Ille .n«1 ()!t 1<1~jl roo.! p<1ctS fronl 

11«1 )'I'Jr'sJumpin [arm <\IrnmodilY~1IPL"'arJ (0 

h.tV< ~rid)' dissi!We.j, InJ<ci. J'C'( pO.:cs j;,)r fuoJ 

and b<vtral!>" ~oly eJS,d up sti~h!ly. rilin~ .t an 

;lImual nlte of :>bout '1 r,orrc..'tIt From 1Xc<.'1'lIiltr 10 Mf<}' 

lIft<r III<'rCasma lIWl< Ih.n 5 r<Tttnl m 2011. Although 

farm commodity pcices we .. 1<'Illilefcti earlir. 11115 year 

by .. tpo.,<tafioos ~f • ;umllutiill in,rrase in er<>p ~UIf"JL 

Ibis gro~in~ ~awn. Jrain !'lux:s 10." ropidly in laic 

JUI\<" ~U~ <ally J"ly as a "iJ< $Wain M In.- Mim.'OS1 

'~rrri.n'«I a boul rJf hoi, dry wealiltllhal Farm analyl1l beli<w CUI)'ield rr(>:Il'I"IS .'Oos"l<TlihI); 

SUrvc)-boscJ l1lI:aJul<, of n<aN~tm inftalion eXp«-

!;uivnsh;<w dI",,~d litlk. on n<1,:IO fQrlniJ)'tti1 

Median )~.,.·PheaJ innati<ln c~JlCI.1A1k!nJ. II! n:prn1eJ 

,n Iht ~n ftll~rslUniV<1"llllyot Midtjpn Sur· 

W}"S (lfCooillmm (Mwhigan surwy~ rose in M.ren 

... h"n ga<olint p:ns "'''rr hi~ hUL thm r,n b;lct u 

IhllS< pri<xs ,rttDN <"OU"" (~g"T< JIl) LOII~rr-l<1"m 

'~(I<.'<tal\On' rtmain.d m=~abk. (n !Itt MKh,g:lo 

SUr\I(Y, mWiom txp«led in~;ui<m oWcr the n,-:'I ~ lr 
93 


L! MOrn:lar}' 11J1icy Report 10 I"" lOngre:l$ 0 Jul)' 2Q12 

.l& Median inlblioo "J'C'UI>OO>. ::nJ1-I~ 

- Mltl_ 

!l1)'C'N ""iU ~ pore.'nl ill (~t1y July. "ilh",I"" IIIIT' 

ro .... r~ni~ ~f II>< pagl 1(1 )'<31'1 In lbe: Su" .. ), of J>rofwiQnall'=aslm, ronJ~Clcd \l)' the Rdcral 

R~"" BanI: V( Pbiladdphi:o.. •. ~pC<:1 .. i9lIs tOr lile 

iOO'<lIk in Ihe pric:c mtk.~ Ii" PCE O'otr the n.~t 

11) )'<arl rcmain<d at 2'1. potI.':nl, In Ih. midJle-of itj 

1'«<"01 ranr<. 

Me~surcj or medium" lind l\l!Igtr-lcrm mlla1ion 

oompCllloil!ion d<Ti'otll from nominal ~nd ,nllllllun· 

rrulMcJ TrelUUJy seCllril;n. \I,h",h tIOl only re~«I 

inlWMl extx<1;l!iim~ hltl ~cao Ix: alf""l~ by 

changes in 'rt\~~tor ru~ "· ... moo ond by Ih. <lift.renl 

liquIJiIYI'f(lp.'rlics<>llhr 1'0'0 Iyptlof StC\lril~

Vir .. lillie ,hangeJ, \>11 0<1, .10 f41 Ihis ye.r (~u" )9). 

T~ measures ill<rca~d eally U! 1110' r<'fiikI amid ris· 

ins prices fM oil and Qlher COmmoJil"" bill IhtysuhStqutnllyd«lioC'd A,(\lmmoJil) ~ fell ha<k and 

al \Illlm:.: ~ul dilm<:S1i< an~ j!Iobld C(on(lml< llM'lh 

inclTaStJ. 

Vin,neilll Dc.wdopmcnIS. 

Financial m.rkclS ,.w< romMl'hai volati!. ()Vef III< tif$1 

half of 2012. F4t1y in II>< year. hroad <quil), pric:c 

indexes ~ and r~k spread! itt ~ mat~.t! nar· 

rowclllS in'"<:SIOt scn!iJll(!1t rtgatdill$lOOrHmTI 

Eum~an (If\lsP'Xl$ "nJ Iht «<lnQm;';: ~ll ool. 

imfil'O\'~ , n ilS(" gai"s pa,,",11)I rtvmcd ~n<n mHrtct 

raMicipan!s bcc.mc mQrc pt)$irnlltlc.!>auillio (unl. 

~~n sltua1ion and ~Iobld grm<olh PTO!fI<C1s in Mal' and 

June. YIelds on longer·lrrm Tl'I:asull' li«:urilics 

d«lintll. Qn balancr, <WeT lilt flf'lhaif <If lh< )'t"". 

Condil;""1 in un><''<1ImI.<ItoIHtrm do\1;a funding 

.1Il, IOIbl","cornptIlntioa.20lJ'l-I! 

-- , 

_. 

_'Il<_ .. ~ ....... "aly __ "" ......... 

,., _n.-r ".~t~ ........ __ _~ T_--"'_ ....... ...-_)'d*" 

(lII':'l,,,-"""_ _._ .. .n, ..... _T~ ._ .............. __ _""1'odmI ....... 

OII·_lIP5 l'"-'~ _ ........ ~ ..... _,,_ 

... - - ....... ,-.. ,.. y .... ......,.,-.""" ---

mJrket> itn,rall)I nmaiocd stabt<- as [uroro:~n fiBan· 

cia! instilulions r<dUC«ll!i<ir demand for <Io\l4r fuod. 

log and ~rncral funding J'I'I:SSUI'tS ""tre allt\'iat.d by 

tho I~nser-I.rm rtfinanciBi <>p<rnli",u of the liell In 

Ibcd,>tDI.'S!;c bankmiRX.1~ II>< r<1 .. ",of lhe n3U!II 

rrom Ihe CompTe""n,;", Capilal Analjoi, ""d Ro,,,,,,, 

(CCAR) in March pnwidcd. signilicMt lloJoo «lthe 

O\[uil~ pri~ of U.S. financiol inslilulion, (xl: lb. oox 

"n. Cilpilal .nJ LiqukhlY I\>lilion of l.;11~ U.S 

lla"ki~) , 

MOnrtaf), P<lUey EXpH1atfDnund 

TI't15Ury Ra lt8 

In fI"Sp(lnJc lO the llepS laken h)' Ih, Fcderttl (>r<n 

MarkO! Cornmill« (FOMe) 10 IIToviik aJdilklna! 

monr1al')' policy "O<'eOmmodalloD, lind _mid ~",",'ing 

aru:ktY about Ihe Europtan m'is ;IIld • "'IlNCning ,]f 

IhetWlI01nieoollook, im'<:stoo plISh«l 001 fUrlhtrlh, 

dllln.h~o Ihcyc~ptCl tile fcdmll fundj .melO fil'S1 rise 

ah. .... 't.1$ cum:nlla~1 range of 0 1<1 t,. !".:rt'ffll, 10 

addilion. Ihoy ft!'P"rtnt!y .'lI:"kd blit~ Ihe P"''' .. "hidl 

IlI<y ~r«1 lh. fctkral funds rate IUh!oeqllrn!iy 10 1>1 

Hlcrea~. M.rk<l parlic:ipan1$cufn.'l'tllyanlkip31< 

llullhe cltOCiiw f«lora! funJs r;l1e will be aboul 

50 b.li! poinls b)' lhe middle ~r WIS. l'Ilu~hl)' S5 basts 

p.JUlIS l()'ol~r than Ih .. 'Y t~pt<:1..-.l1il lhe b<ginnmi of 

1012. 
94 


Yreld< on I<'"ger-lorm nllnlinal T,,".uuTY~"n i<s 

drcl;nr:d. on habO<t. <wtI' III< ~rsl h:!lr or 2012 (I\g' 

Il1" J(\~ I)rly in lilt ~"ar. JoojlC1·I<tm Trr""ul'}, )';"1& 

r-. n:ftecling~ .. nmJl)' ~Ii'" us. =nomi<,: dllll. 

iml'f<""td marl:.:t $tnilln.:nl n:garding h~ criii, in 

I! uro~ anJ h~l mOI#)'!'rim. M"", .... 'Ctnll)·.h()'<\~ 

<I'<T. IonjlC1.lerm yield< h ..... mme Ihom ",.~ .. d Ibti, 

Cllfl"" ~O"'UCi In.""III1'S_ghllh. ",1~ti'''S<lr'ly 

and ~qu;d;ly ofT", .. !",), serunl'~ 0Ii IhrcriWin 

( urol'l" iQlc",ir .. d :wain lind as .... ak.r·lh"ll"'.ll""t.d 

«Xlnmnic data rcka>ts r~isOO toncorllj ai);.>ullb. P"'''' 

0( «'OIIOII!;' .... '<m"TY OOIh in Iii<' Un;l«I SI~I($ and 

"~d, In addilKlIl.lh<lSl: dc\tk>f'I1I<nls(\l$!mtI 

c~I'-'CI;dioru thlll tb( FW.:IIII RC5tT'" would PlO\.;oc 

lli.Idilionai =mmod~I"'n.l\nd Ih. TrtasuIY yiIIlJ 

cu ..... flOl I.nod further followint-Ih. fOMe'. d.d';on 

al its J"". 1I>L"1;n~ to Cl'm,n"" the 1I1:1l unty ~nsion 

pt<!,gl.m (Mrp) Ihrough tilt "nJ of 2012. On b;ol>l\CC, 

)'idll$on .... II\.. ~nd 3('I.)"'a' nominal T",asuly5<l:llri. I"" d«bOl."d roughly 20 . .\0, and '5 I>lsis !,"~n~ 

1'I'J«<iiv<:ly. (rom Ihcil Ie".ls III Ih. start Qf Ib~ re;or 

Tilt Or<." Mark.1 ;'k C>\lIri.g/l1 ~urth:.."'" and:sldts 

of TrtlI$ury St<urilio:s und.,. tho: M I;P tlid nOI af'r':"J1' 

10 hii''' un)' matm~1 itChI."1l< df<CI ()11 Tn:OSI'IY m~rl:tl 

fu",lionin,g. 

ll<'lpliolhe ""'!ne~'!lc:t of StraIn> in ~u~ CIlnd,· 

lions In un~ short-I<m! dolL>1 fUnding rnlrkcl.l 

hall'l'"m.irlti! fairly Slahlellline fi",1 half of"ZOll. 

M.aS<l~sof ilt<), in slNn.l.rm rundingO\OO.l):.<I,have 

o .... d sorno"'h~l, nn b.uaoo:. ~,t>Ce lhe b(ginnl/l¥ or Ihe 

~I . In ..... , rll<:1 Qo T....r."", ""."lInil«" odttl<d 

'1Wl"lIi<> . .!!X)4...f2 

, ~ 

, ~jO 

~ . .".. "" ........ ....,..ooj, ......... ~ 1\:,IjU '<o.<.iIt> '.-..... T_ 

'" 

-

-, 

)""1' A (tw r""'I~!"I !I«ftIIO ha\~ contribuled 10;> In. 

"'Ial;'~ lIabililY of Ih''''' m:uk.~ (utOf"'an ""'<lilu. 

OOIlj 1I!'r>-.... '!ltly rrouc'ed Ih.ir demand (OJ! f"~lI$ in 

rtO:nt quart""" by !ll:lIinr rk,Uar«oomiMt«l ~ll 

and Q.itin~ flQ111 bAAlIus lintS l'C<lu1riD8 bcll\')' doUar 

funding In addition. European bIln~s I'CPIlllttlly 

1i\\ ;I~""" t""",,un:<! fundi~ '\I~ro'l.d by ,,"!io~ 

types of ",bill=!. furth .... lh. Il\'aililbilityor f\lf\ds 

(I<>m lhe ECll th,,>ugh >11; 'o;>ng<,·tnm rtf nan.in~ 

Ol''f8t;.x,S likely.helped rtdue< (undinll It lain! and II!<. 

n«d to accc~ iOlo."Tbll1k masl.:ol$ more gt:norally. 

Rdll"ling thtsc d,,'<'i('I'1JI<1lts. tM ;uno"nl of donar 

$\I'llV!' (>utstanJing \xt"'ttnlbt 1'«1<101 R<:Si.'I'1: anJ 

Ih. (CD ha.: d~~nw $uM;,n i:IU~ front its r<ak ell" 

Ii<:lthil )'ca, 

Conditions in Ih. CI' markol "~,,,:I!.oo (ai,ly"'bk. 

On n<t. lIl-d:o)" JP"'".0.1$ "r IlIICS on lW<Cun:d A:!IP: 

CP oW, OQmrarat>l.·mJ(Urit)' AA'!UIN nonlinllnc;" 

CI' d,"linrd ~ bit The \\llume ,,"Ulanding (l( "AA" 

,urrd h;.ndal CPi>lllli."\l in 1m, Unit«l SI'I", \))' iM/i· 

tUIi<.m>wilh Eu!'O)'t3n I"'mtu!k'l:ftm !.lightlY ilt Ihc 

finl half of Ih.)'taI. Til<: average malUrilyof un>'C· 

tUl'<d lilU<""ial CPi~UI."d b)' inso;MiOtUwilh Nih U.s. 

ilIId Eurorcan I"'rtIllJ is ~bou\ 5()d:o)'!.3 levolllt~11S 

ne~1 Ill< middle <>f its h;'torir.:1tI '~ngt: {figun: 411 

Sig:tl'i ~f , t!<'!ll w= '"-'" lalgdy ah5<nl in S«tIh"« 

<hon'k"fm doUar rund;~ I!1l1rkel~ In Ih~mllllcifoc 

rtpor:b,se agrc<:m<m" hid -",~ro j~ad, f()r IIlOlL 

coll.uoral l)'p<s ... ..", lill~ chang<\!. ! 101.\1:\"1. slum· 

I,"fm inle""'1 nUes C<lnlinu<d 10 i'dI'< up fl\>ll1lhe 10'.,..1 

0\>:9<",00 &round Ih. lum of Ih. Y""'. Ilk"l)" rtfleeling 

in ran III<: ~n3!1(1!1J! of lhe incl\'lS< in <k-«,,. inwnloli<'l' (l( ;bpn<!·I<lmT",asu1')',,-..,urili .. Lh>1 ""uh.J 

41 AI'tI:l~. "'''''''y """.~ r"""", .. 1 ro"'tI.,«;'1 

f'lpCrOll"lIlllll"" m "'" Uni""S_ ~H)...I! 

• 

• 

• 

" 

,. ,""---' ~ ... -~~-",,,,~ 

1010 0!Il<l 1011 

~ ... TOt ...... -.tyool"'_ ....... ....., 1L.:lIII.l. 5< •. _____ .ol __ .. __ .. 

"'-T_ ... a. ..... c.r-
95 


24 Mom:lar}' IIJIicy Rq><>n 10 Ih< C(lug=: D lui)' 2Q12 

The capl!ar and liquilfity floslHon of large U.S. flanks 

1<1 miol-l\l>o'd!, !h~ k<ll'llI ~ • • "'IOUOO'd ,he 

...... " ,~. m. u,,'~""'" (.arM" ...... ~ ""d 

~ ((.'(:AI.) :roll. 110" JlfOtPm .... ILIaIe<.I ,he 

""1';'<11 p1" ,"i"g I"""""'" ,""I ''310l;0I .. Jec~' "'-r "r I~ (I/'hl'~ borll<, ii. lub"",(J/t""""hillwili 

1M' reqt>ftd IQ """'-"I" ",.,":oI_'e·'''''8 ~,

C"'" II)' II" Ikt¥d (1/ C<Mrr1OO ",)(hot IIII' lI<!<lol 

1';onI;\'I'.dI"', .... ~lonn.I<lC' .. ""_~ ... 

...., (1/1010 (n.»1-I'*'l...., ~' IW 191",rll:1I(oId-

"g«l~"''' (IU~"'" f\>ni<ip""" io iii. 

lOO9 SupeM""Y Cai.I" ~">e<>l1'rupo and 

,II<CW"20II,llI<lIJl"'n'i""'Y",>:,>,,<;<b,nod .. 

CC\~ :/011 ",~ ... <:d "helhe' v.. hani<>' """",,,,,, <>I'.:.I ..... ,~_ pI __ ~I ol,-"lI<",., 

,"';"IiI;".U!li<k", ~~ '" ""f'P"'IlnMl",S I<> 1"'....,t.IId' ..... 1 I"",_ ,., ,he ..... ~ri .. , .,.",.Ied ('1<',xod 01 h<l;Idy ..too""" """"""" anrJ 

rmm III< ongoing MEI'3Ild high<1~han~p«;I(d bill 

i~"an<t by Ih< Trr-JWlY IJotparlmonl ~arlkr ill Ih< 

)ur. In aSSCI·ba<k«lo.Jmlmrciill rap:r(ARCI') mar~ 

his, IIOIUlMi ,1ulWlndlng ,,"Iinrd I<lr prog:ranli "llh 

EUrurx:an sp.'Mill'S, and Jj'Ir( Js On A 11(;1' .... Ih E~",· 

po:an Ixmk 1ptJn$ilTJ "'''main,,\! ~ bh ub.:rvt Ih<lSe ,m 

AIlCI' wilh Us. bank !p<>nwn. 

RespOn;k!(ls 10 lb. Senior emlil O/lie<r Opink'm 

Survey un 1><1ll<r financing Torrn; (SO)OS) in oolh 

Maro;h and lull' indicMed tMI <'T<d~ lerm! appli<iIhI< 

I" ,m1"lllanl elllSSl.'S of C(l\ml~l1ies h~\~ "':m Itla. 

~w"d~""". n.,.,lIn" '>CI'f\Oriuin(<J<p<r 

,,1«1 . I"'. """'OIJ>IoyI""m " •• m IJ ~,,~ • ,ltOp in ~ pOCe (1/ _ 11ta'ISO pem.,H, ..... 

• ,J.<f . .. in """'I .nc..of11 """",,,L 11 .. """'Il< 

indicott-d '''11\5(1/ I~ 19 81"'",,"id CUOIiQ .... It> 

",.,..,~ .. I""""'inn$ w,..........aI ''''''· ... ,... (11-capiI" OtIequocy II~' llie eO(] of201J 

11 •. " .... 1.111;1' IMojN:I«1 1M .... "",I ... ,h~ """ ...... Iv """'"'''''"lI'y pl)l. ~;.; .. ><:I'~~I!·,.~

po<I'<l "l>il.ldiillibutiQ!, pI;im.' 

lhr ~ rnuk, 1t Cl ,he ,;g,.bltllt'P> ,"""" 

mIG h ..... lOk<n "' "'~ """" IIH 0]0,,1 I">'i""''' "" ... ,lie p .... """ y .... , In pl<1iadilf. Ihp "W". 

&_ [;"',"""'''''''' ... 1<>/''',...,..,,9,. ..... ''''. '1""bfp,1 /rom obwI 511 ~nl "' ~",Iirst q ...... , 

"/2OO'l,,, ,to.. ", II """: .. ~ 0' the ~r>I If''''''"' <>f 

ZOll (~e AI. Mlo<.l1 " It.. imprtN.-me!L! ""'" lhe 

inI"""'~ 'gp!'rioll .:-.. , 1 .. II\I>buIMlo Inn~ 

rt!>ined ""~",,d "'" ~ of COI!'nQoI)l,JP, 

dUl,,'K ' /" rlud ",~""oed 11"""'11 .. ,0)1; .... MghIl'tl -lhe . 1911101.w!'I"'"' 10 lhe CQ.R h .... :ok<> 

~"""W 110"., ",,,,,,,obIIille< l(I i1i«"I ~i<Ir"' ", ru.odint m>IteI>. 101 .'<\""',!Iory h:w. ;igt>iIioo,tty rrdu<l'IIlhcY ~~_ ""s/IIX1."""w~ 

1;Wili(ft» ,..bIMO "' ,,,,,,1-.. ... ,,,, 1t..1 "' ~ 01 

L 'loo~oI __ ~<nJ< ......... <>f<l. 

lbIoj-ol' "'t ~ ..... """"""" "' _ ", • ....-. .... 1«1' ml _ .... .!t>..."...IoooioI_ ..... Lj....,. _,'01"' __ _w.. '''''~_ 1f_· ....... IIoo ~-w..,..Jbr , .. I,,1I<>I _ ........ """ ..... tt.<.t_""""-.. """'2tIII, "'"--

~~0I , .............. .. ""' ....... 1.-... ..... 1t __ ... ,.....,.'1Io r..t...l ~ ... ~~ __ .""' ...... ~ 

....,"",.,.... .. _ .. s..~oI~oI ... 

r..J.ql~_'lf'k .. OOll\.,_~ _ .......... od 

_"'_<l"'._ _ ....... ¥ I;\J. _____ .a.t.Mo~. p/ ...... """", 

l"" ... lJ<>tot'Xo.lfl,o ...... lo .. 

Ii.",)' It lINt sinu: Ill< b<~nning "r tbe )~ar. ' In aJJi· 

lion. tI<tIlcr.; rqXIl1.d Ih~II!Ic u~ of finan., ... k,\'J"agt 

among hrdllt funds haJ ck>:It~;c.J SIlm«l ho' SIne< ttle 

~nningcf lU12. Mctffil1.T. rcsp:mdenl! III lilt lUnt 

s("OOS nCI<:\l (on inmost on Ihe AmIlUnl of rtSIlUIttS 

anJ >llt<nliOl'l dc\Q\ed 10 1!Ie mllnalCmonr "r ro!I<'\'Il. 

l"'h:J .x(l!>surcs t"dealm~"d other fiMnci.l inlwnc· 

l. rr..SCOOS ... ..u.\o , ..... -..R=o .. \10:0-.'."""', • ,.. .... r..tcr.lmrn<.~,~"""'.",_b' .. 
96 


II, ..... M .... T"', I " ........ "'~"(J/""'CCllk 

10lJi1.~_1OOl-12 

- n.:"" n:Ai 

" 0 0 

" 

~ 

~'" ;w, )~~ ;tin ) m 

NOII01Ior"" ... """""ooI_,...".;t)II.QI .... .. _<111 .. , __ ......... 01*'· .......-c .... ...., .......... IIr .... ,_ 

... _oIo..-oI"_~"""" w-aall • ~~"""""' ... iI< ..... MI-*"" 

.. 

__ "....,----.-,~ ,.. .... _. .....JI\'o'<I.'fII~'l.~I .... ..... ~" .. .......,.c.,..o_~ ~_-" __ 'XT..\<:.~ 

r __ s.-",_I!.>IIotoI~ 

II .. ",,.,..,;;01 <rui<~ ... R). ~ .,M "~ tt."", 

SilO ~ e:q",,;.,~ ~¥Ii .oIIowsof ,0\0. 

t"",,," ~>L4< """,del"","" ow;.,!;'" 1<It In <I ... 

ri"'"Ilty"I"nl;nIit~~ ""'''''''oo """'""....,...b(o.riIIg n"'!><lIM a<CQIJ rII$ ,,,,,,,~ 

1<.'fi11.J<ovO>i! ~~ (l;>rpo<.lior, "'d~ tilt 

end "/2011, ., .. ~~ lS lllt 8"'","""I~ d,,,,,,,," 

k,,~"'1I>J liq",,1 W<.., .. ,t.. ClI"" '" 

...... " .. ,,"'.,.. fMroI( IIl.r/o.>r U.s. ftn,o,oci.II k,lIju .. j,),,,~,~ 

" •• :11 bt-ft., 1~'IiI""''<l to .. ' ....... , "n """.""ok 

dbr;":iS "ell a. ""olra! <~un~rp;u'1id aDd Clb.,. 

financial l"" (figu .. J1). In n.-.p<>me tn ~ ,p<ciaI 

qu.,hon in the lUll« SCOOs. &>1 .. , "'p<lrt~ Ih~1 

dc:<ritrill. pc";'lonlly low 1=1 of ",1'''''1 ral ... only 

rood .... ,. fradion, or Ihm "nle.-.:ml il\Sl.lulionai di· 

en .. had sh,>WlI &II I!,tn"".,J "PI" lil< r"rcn,.'I1il rid: or 

durtllHlII Ii'" O"It, lhe 1*'1 lear. 

Hllllnd f1j(1i lll ti~a . 

Mar CI "'.Iimenl 1o.)I'"ltrd lilt ~okin, indumy OUdU. 

"led in lh. firJI holf of 2012, t:arl) In rh. ) .... r. ,rr .. ,h< 

II. K. li>l>«OIl~lIvksalcfw.Ji~byC( ... 1I 

ioSli"'''''''.2001-12 

L~ 

-

" 

" 

, 

> 

_ 

);ow: TOo ...... .......,..-1 _ ....... ;bllQ' 

_ 

.. 

.. _ 

_,....._ ...... <:f.:,\ •• ~"'''-'_ .. _-- ... <1,... --........... ......... ...,. -~- ......... _--...--

_. ... __ ----~- ...... _ft ........ _ _ ... _ .... _-..,""'_ ... --,- ........ _~ -.. __ HI y.oc, C.-.... 

__ "'l.oOl ...... C ...... 

,j""""",, "·~i loo ....... 1i,,~11It ~liI l.....t. ,of 

1>QIt:T\1," ~,.d ... . !Iey"""" ....... )"'" 

¥\ 1"', ,, g....,~.''';.1Iy i""",a"j ,II"" <", fit" 

~'"'" ~~II>elr~ ... IirrI¢l!io!I!Wt"I 

It.. f'I>''''''''''! \'<" .... I loll Jaid.. "",* .. ~ ,,,,. '''I\,ion iuglold oo...o.ia! ", .. lc-t;.~, lO>,,~ 

.>InIt ~'"" lu",I'""" ""w.,iM "" .. 10 ........... ~~."' ... I!I5IiUl_~3I""ctral4tn),"" 

'" tb., t,5. """king","1 r"' .... '.I~~'"' .... 

acli~n! of lb. I!uropcao aU lborill!.. lo .aile Ih. eu"," 

.",a, .. w and lin: ",1.""",[ II>< "".\1, from lb. 

etAR. "'Iuily pri<e:s lOr bani: boldh" oompani .. 

(1IllG) i""""oed and Ih.".CDS 'l'f"!!<l,doctined In 

lale'r"n~ "'I in.~",o", """"ed 10 oon"",n, aboul 

EUrop<.-quiry"""", """' .... d,.,.,., ,>I" ill""" l!';ns, 

and ens ${'f<J<l.,o", rOf I;ugc HlICs. especially thoso 

wilh subslanlioi in .. s.mc't)l-Nnlcin .. "r<rodio .... Mo .. 

.. ""nlly. Mwdy'Sc!m>ni",dt:d I,. long· and sbort· 

l .... m credil ralin~(\[ fi", of Ih. <J] I.,~ U.s. bank .. 

bul Door: of Ihe banko 1",1 Ilreirin.mm.nl·gradc.I~I · 

us "" Ionr-I<rm debt. Th. ""~'H .. m d.'" r:1U"!.' or 
97 


26 Mollctary Policy Ro(l'Orl") Ih. CongmsD July Wl2 

41. N~ ruc<lll.O!«o( <lc:dao .. fUIUl! i""",.>Cd 1IW:n1U. 

10 m",,,!"""" ofoxf"'Wl'<S, 2(J1Q-12 

-

,-- ~\ I 

• 

• 

• 

• 

~.,. 1'00 ...... _ ....... .,_ ... _ ._"",...-. ..... __ ~_ .. _31"_.,.._"""'.'\I'lQ!.'~ 

............. ....-"_ ... """""'- -~~",,-~- _"_ ... ... "'"""' ......... _r_ '-.otf''''-----.. , S«wr ........ _. __ CooIoou.r...o,o-_'Y_ 

u..Jr.F_T_ 

S¢m< banI:! Wl"fe dcw.ngr • .w 1(' l'rim.·J, whkh may 

1!Ife<1 lhe abilil)' of JOm< 10 pl.aoi: ligniflCanl amOUn!> 

of cr .. ith moncy markcI fund~ blillhe ma,);e\ offrct 

aprcafi HI hWo'C been mUlro SO far. lU 111= banks ~u,· 

renlly hal .. limil<u <km~nu for such funding. On 001· 

ance, <4uil) priru (of bankl rust significanlly from 

reiJli\"dyl()".ll kvds al Ih. Slar1 of Ih. )"3r (figure 4J~ 

an indtt of CDS spreads for Iar¥C BllL's declin<d 

aboul6Q basis poinl. IlIII "."main<d al a high k .... l 

(figure«). 

' .. ~ . "-.. ." 

• 

44 Spmds 011 <"I'«liJ <1<1",11,,,,,,,, f ..... !«tool 

U.S. t>Win& orpnil>l.I\)II~ 2007-11 

--

,. 

• 

~. )ft; 1'oo_ ... 1IoiI) ... " ............ 1oIy tl.lOll ._ ......... !or ... 

... __ _ 

$u .... ~ 

Th. profllabilily of " 11Cs decreased lligbll)" In Ih. 

lim qual1er of 2(m anJ remain«!,...11 bd<)Wlhe ,", .. is 

Ihat prt ..... ikd !>:fore III< finallcial crisis (llJure 45). 

Liligal;on provtSi(l!15 lattn by fllII"I< large banks in 

COIIncctiQn \lilh Iho mort,.gc .. Itlemonl ,.:a<lI<d e.arI~"'T this )~IU lICCOunled fOf lOme of Ih. '!<' ... n .... rJ 

rrmure on bank proIilabilily The '·~nabiliIY in wningsduc 10 aro,)untin¥gllinl Ifld I~ rel.ltd 10 

chall8"! in lhe mar'~1 ,liluc or bank. oWn d.hI3mpli· 

fitd f«>:tIt""ingl-of bank profi!i' Smooth;"!! Ih",u~ 

l Ooobr..r, ..... ..,."...... ......... Ik~ 

_Q(,BHCIJ" .. ;r1llt~iollot, .... _of .. ~_ 

l_~_""",~ .. p..",!oroeo",,'''''_ 

--

--- --- ~.- " , 

" ~~- " 

, 

.. " u , 

~ , 

- ~ 

- ." Sn'I Tk ..... """"" ... _ ...... !III!QI S-''''l'_ --..!IooN, f1l Y-'IC. ~_ - ....... ~~-
98 


lh<sc "IWiai r~",S. rrof,IHbi1ily bas \>(t~ a\xIul ~>II in 

fOO'nl qUirI"rs Nri income wnlinucJ IQ IJo, su(ll1'Ol1ed 

by Ihf n:I ... «. o[ kun I~ 1'tU ..... " oJ!>.:;liD .I~f 

~~Ienllh"n ;n th. PfI:';OtlS }'t~r, .l$ ehaf¥<:~ff rilles 

d""mucd . bil [ul1~er ""IWI m~1 m.jor~' dass.,"S, 

Slill·,ub.iucd d;,jdrnd Pa)'OUIS ~nd shan: T1:pon:hascs 

as ,,~Il "" mh":li"",in raI:."~4!hled ~l' ,,"sh,d 

rtSut.tilry <;apilol ral;"" hj~he. ;n the fi"" QuaM .. of 

WI! (= Ih. b.J.\ "lmr .""'"I;ft~ Ihe !'I ..... Finanei,. 

Rr$uli>!OI)' R'$ml"~). 

CMl,I ('fIWided hy commercial I>.utkin, vr,;anil.11-

t~ n! in the Unit.d SI~I"" dll'n!lI!I:d in the first half.)f 

2012 at ~"t Iii<' same m....xrJtc pace 1$ 1II11H: "''CORd 

half or .)1 11 Cllfll kiw Ihe jum I.II'C&lloans. rtal 

"SI~I" Io ~D!, and Cl)nrumcr Ioanj '~rand..'11 modc>tly: 

as n!>led "'rlier. th' uplum in "'~ding "'JS raM"," "rI~ 

nOI .... :Ibl<: [",elil klJln.(fi,urt46). """")IJIII!~'n in 

C&llen"i"~ hllS betn OnIJlJ based "uls;d. of us. 

bran~h~ and agenr;':s of (un'i"'3n bank$ and b.'lS 

bffi1 ral1icu .tl~ ""id<nt "I IOf¥<: JOIllC!l it: bank~ Thil 

pullern ~ ..mt;i:ll<~t "';11t SU)OS tl'luJlS jU.\'!J'$ling 

Ih", a lWlion or lli( incl',,""" in C&I knding (l\>scrl'Cd 

"I large d<llllC1ilC b'lnkl tl'Hock'd dt.."mISCd comi"'titiQrl flOlll EUr'O!"iI/\ banks .rxIlhcir ailili~lti anJ JIlt>- ~idiar;ti (OT ';Ih .. ~re>&'l (If <l<>tm-<Iic OU;;11>mers. 

lI.nu·IK,IJings or "",U"I;"I'(III' m~'Oldl' ,,;th 

fIIITtha!eS OJn«nlr.MJ in TtI'>lSUT)' "''I:unIO:s Md 

~ncy1'u~rantc..'Il MilS, OIVl'n 1M ,lilj-J..1'tI'5«J 

",",using marUi. banhWnlQl..J Iv beanr.lol:1N by 

.II>. C""' """"""""""""DlIWn>l """",, ....t""" _ 19'I(l-!Q12 

---• 

• 

" 

,,, ,-

~- " , I I 1'1 I ! " 1 ' , , 

Iii!/! ''''''' 'i1Jr ~l 

........ _ l\Il~r ... ""-.... !odo __ ... ~~ • ____ .. ....-,-",_ ...

_____ 1loIo .... 

...-.. _-............. " ........... -... _-..0.l000<I'.-..,'''-_-.0 N.oo 1000 ... 1f!''''' ...... oIl' .... oIt.,t __ _ .-SOl ___ .............. -.. __ . _ _ ... TU.·_ ... 

~.r_ ......... l~,.,_· 

lilt l!P'.r~"'''!II ."".,""'- on IIgfncy scwrili~ ~ud 

rome IafJl' p"ntJ mil)' olio b",,,, b<cn """um"!>lin, 

¥1I"11l1ll,,,I.badcd 1OCuriUI:l 10 lmrr<"~ Ihtir li~uidilY poJi(i(l!lS 

~I<ldl 00 itlll<::llm<I1l.~( bon.b r'lI<h<~ rroorJ lQ'o\1 

10 June. pa.nly •• fl«ling ,helunh by ip\'~I<m for 

rdaliwly s.lf( !W<IS in lishl of n$log COn<Xll1i abelll 

EUfI'flC 013 ,..dlas tilt ..... aI;:JI(!< III tit. dilm<:llic and 

~ crooomic dala rekam 110"-(1.,. j"iclJ$ On 

si"<'<'ulatil"·waJ"rorporato Jrhl. "bicb had f'I:'...-:hN 

=ord-\oIo' k~<1i io F'~I'lnL:tl)'. fl)Je lOm,what in lho 

.. <-on.! qU41'1.r I'<!k"'!n~ 11K»< lOm' c¢!l"''''' Th. 

ipread OIl inl'cstm<ntllrad< (vrp.lr.ll. bunJI ""I 

~h. ut un.:haogt\l. OIl ~, relal;I\: In tbe !loUt of lb. 

)rar. [)<1!litr Iho blIt:k~r In )'i<:\ds (W<;f Ihc ~nd 

qU~rI.r. J)'IItidIIlll 'f".'C\llal;I'\~f;rlld< <.>.\rpolrnlc I'()nds 

docfl.'aJN lIOm(.1>fI I>aIJIl(;C, O'IU Iht I.tm( prrioo (fi,· 

Urt 47~ Prim in Ih. !I.'COn<laJ)' m.r1tt1 f(lf ' l ntlico(<<i 

b'.ugW !o1ll1' h>l"l: dlolng.:d unle. On bal.",,<. Jintt 

Ihe b<~innillJ! o( Ihe Y"~r. !klMt><! rrom iollilulio..aI 

tnw.on for Ihe", m(lSlly ftoalm~..rat.lo.ms h,l 

!'(n1alncd .I1fQIIj! tb!lilolhc I'ttll1<1tCllCt ~f ~n~,(1y 

aboUI de,-.Iupm<'" in Eumpe IfiBUrt 4~) 

SroaJ equily p""y inde ... "",e "", .. led early in Ih. 

) .... 1». irup",,-.d ",nhmemstemminB in j>Il,1 rrom 

.d.1t;'V<1y .troogjoi> gain< as ,,~O .. oclion, lak.n by 

major conlf:li b;ml;, 10 milig31( th< 6nllJll;i,j main • 

47. Si!<" ... ..r""l'-nI<b.nJyidd. , .. <r<:<o,...,.nbk 

off tht-nUI Tr<;lSI.Iry )"'lli, "'" «<llnti<o'",""" W7-20I~ 

--

1 I I I" I I 

,990 I0I l'lOl :®i "!!tOo .'tU< JlIO '2Illl 

.. " 

" 

, " 

• " 

_1k_ ... ..". ... " .... ~/ltIt L'. 31 l ..... .,.... _ ..... ~ .. ~_ ...... lo.,--r-,t"""- :'>"'<1' _ __ ""l'""< ' ''''' ___ " "",I '.,d ___ 
99 


2iI MOrn:l:<ry' II:>Iicy Roporllo lh. l;lDgr<:SS D July 2Q12 

Imillementfng the Nl'w financial Re.c:ulalory Regime. 

l~b"'"fc.:,..;,'O\lISjj"'~""I'~-

" ... .ly 250 io"i~,od;"g'""'''''kio,gs. """-

~t:I'Od>,,,,,,, .. udie>"'-''''''''''Ii" .... OoI~ 

•• 1 '""'1:" oI'iI, ... '''oIl'nu .... -",I .. .,) 10 to. Ot><ld- f$!k WIll StteM- tek.ont'llOtl (U"""Tk.'r 

f'roIfiliMAool'7010{Uodd 1, .. kAttj.11Ie 

llo,,~ ;"Ihe lead iISP.''''l' ~rO<t!iIlI< lor ioi'{ll!'-

'''''"li''~. ""'ik.i ~ """ ,Iwt oJ ,....,mili"&' f'l<jUlr\o<l ,Inde, Ih.;ICI ~ is.wo, (101 many (01 

""""il1i1i" ..... """'"'I;inn.'I'''..,''''' .. iIII,'''''-'' Jeik:-ra! ........ ,lo)t."...<'(!II'."'.~...r!l~, 

linoncialS..l>ilityo,..,.;gtd wmti! (fSOQ, ,lie 

Iio¥d h .. ,-!.<driOO!~ lv ISOC $h~ "",,,w,<'d 

b)""""'>11<l""'~thcISOL""'~ I"" 

I"'!C<laod Iln.II """""""'&<. ~ 

",,"'''\'''' 0/ Ihe n.l.,m .... 'I;'< ... dl"'-Ittl III b.onls<~"-""<i>ioo . ",1 fl'\l<lor~i ... .II __ 

d;<nl$.1n "'''' rt'< .... "'100\ Iht iI<>ard.tId Ih .. 

",to...- ~"" bank ,i'gUI.""'I ..... ~ ioot<I ~ 

R"", ruIr ,'" lu"~ 12012, ,1<;11 ,"""""",,'I$""'~ 

tolht m •.w <i>I< <l>j)«.1 Ilk. n ..... d,~"8t.II!I"g 

~ ,ntO CMiorn .. r.ce willi ""."",ion;ol",.tId..-ds 

..-.d '~""Y n .. di! ,.,;'1(:> wilh Me" ....... e sI."d .. >d, 0/ tt<'difW()ni<""", I" ..:mId .. .,.. WIIh '" ,,,,,,,,,.moot. 01' """ion 9J9.A 01' til. Oocid 

10IIII: A<'\.'!n oddit""" ,~,ng ""I.' __ 1""1' .. <"<1 

I»' b..nlc hol.lj ,~c."'~"""-,.w~h """', 01 S5ll 1. ]-

1i<'I!'" "~~ "".fi".j n""",""""in 0,,,,-

~manaliru: [rom Eun>JIC. H""",~,. oquilypricc ind .... 

.u~ ... nll), ", .. rxd a ro<Iio" or lhoi, r.m;." ~"tD~ 

... coll<.mS aboul lh. European b;inkin! and fi"oiI 

erisi, inl<nsifiod "lain and oron,'!IIic "'purl, ,uue;l",t 

,10,,-... wu-..1h, on baI.ncr.. III homo ""d ""n,ad (Ii]!.-

u",49), The,pmHl bel,.. •• Ihe 12-monlh ;;,,,,,,N 

.arnings p<i« llollo ror lhe :\&1' 500 "uJ • .-...I 101l!!-

run T", .... rnidJ 8 muth gaul,'<-' or IheoquilY ri<~ 

premium-,,;d<:a,'tl. hil m(ll"< in lJ.efim hlll( or 2012. 

and io< nlJ'll <I ...... 10 the vuy h..:h Iewll il ","""hod iu 

~~nd "l"'iD 1.,1 fill (6~", 50~ ImpOOl ",.loIilily 

f~r lh<.S&J':SIw) lDJe'X, .. ~a!ClIW"" from <'!'ilon 

pri=. .pik..J al I""", IhlS ye>.r 001 is <u.",nOy 1",,-a,J 

!>eo 1011.' On )u ... l'l, 11112.1t.: ....... dund III< 

(..0..01 0.1""" ,."~ • .,.,..(mp<~"'iQoI .. ",,," ........ 1 

Ih .. "'-"llleyw~1 "",10 "'"" ..... , durins.n.,..,- Hod I,""" 0(2012.11,,, ~ >t1 ''(In .... j.I,,,,, r.oo. """" vll.""~"Sl ;nl""' .... ~.aIIr od~ bankiOf: "'ll"''' ....... ~ 

IIIw. ~.I 'eo,' fIOIic't-"Qf fIrVI!Q>I'\l '~~m",,­

o.gs\NPR;J ;'''I~ingl'''' IJudd- Ir.onIt A<1 

~ ... ,. bto-n;;,u.d Ihu.lariol 1012. in ~iruIa", on 

I"'" ~ 2011. tJ.;olloatd;.;u"d "",.""",...",11 ... "" 

~ ....bIn ... 1j""'lCI!J:eIh ••• ioIltgJillelhc 

""''''''II .......... ,''''~ """"'" 171 "',"" an willi 1"""'",!lj)elIIIGpbI~inonl .. lo 

001.,."", J;o",,"'" ,,, ... I"y,,,-Iok .... , ... ".,,~1II< 

""nlon ,,,,.am,,,, imIll"'_ • 

(h. oollom end of I~~ r~ Iballhis lIIdicalO' bas 

(<<upic:d ,int<-' IJ.. o.~ ..r Ib.' rUlODdal ,Tim (figUR.' SIl. 

In Ih. """,-,nl •• ,irunmenl of '''ry low inlo .... 1 nll ... 

mUlua! fund. Iha! in,'",1 in hiP<r-yidJ;"g d.bl ;"mumCDI.< linduJln~ .<rCWlali"'-srli<l. COIpIlralc I><md, 

and 1.",raged loa .. ) 1"",lin.oJ 10 h3\" "gtlifi""nl 

inflo,,~ I;" mosl IIr the tirsI holr or ltll2. "hi!.: monoy 

mark,! runJ .... f'I'ri."""'()"ld""~ HiIII''' 52) Equil) 

mutua! fuod!< oIso rca,nkd moJe.1 0"1/1,,,, .. earl)' i~ 

lh. }"ar ~"" . .. rnarktt s<:n111ll<nl dCl ... ."altd.l>olh 

tquil~ aDd rutW-yiclcl mulual fund, r<gi.l:I.n.'\l ""lllow, 

III M ay 
100 


Ihe 1K.t NF'I( w.,.dd .... ' .... , ... <:/1' ..... 1'1' ald 

'1"'1iIy 01 '"!lit" loy, '" I..n. ~q",,;,,&, , .... It""i' 

"'''nlWOllnO)(l~, Tier I ~oliO /Jl 4':; I""Wlt. 

.<I!ilutm~. """"'''''' ,,~'iIy 1 .... 1 ..... ,01 """"""'" I"", b<>IJ .. ui loS 1'<'(\ ..... iIn<l railingl"" min"'","' 

/oI11>e bru;odl; I ... I ~ rdli<! Ifo<n ~ 1""""nllO 

6 1"= ... ' n... Nf'II oliJ<'> ,,,,,"<14.,. '1"do<: 

SbeIIH liql>iditl'ol""d .. <h, wtoido n..", ,Oll ,-" 

tiolllliffd by 1M ~ Q>mm;fto!l' on 3""~"Ol3 

~--.' Tho .... '"I!n<l NP~ ,t"o"i>n "",;lin",,,,,,,,, /Jllhe 

'''''~<""''''01 'etl";"'''''''''''''",,,,",H. 

""""""'" ri>k se~ on<!",,""'" w.""","I01.~ n ,""~"",oI,;,I(w"'S"',d=d,.~ ... 

bt.oc;r!denlm..,IIfto"l"I Iloep;lll.~"')"'""" lhe 

,h,rd Nrl "'4";"" ;'rl<"'''.~'i!IIy art"'" 1M,,,, 1<1 

..... IMtd'" ri>k~>iI;";'l' ,i "..S 0/ <heir """"'" 

odv.nM:Ilj~~ '" rilII-blIII'rl <af'JI.I Jl'O" 

'C»f) iii toe<t., 3(kl1f» 'VU"I~ erNii fbl" 

:nl """'''''"''''-'''')'''''''''"'''gr.,.",,,,1 j";I~Ulions. 

Sr.....! <>I .. , a.li<IM l;>k .... wilh '''Pd k' !h~ 

t)o(Id·frollll:MI prtwodo>.l ",Jdi!>lIIlII doli!, Kl "' .... 

MnnetlUY AggrtglI ~2 ll '" Ftdl'l"lll 

ij$'O'e) Uillilnct ~ 

Til< ero>"lh mit of M2 ~.(t.I in Ih~6rs1 h:df m 21>12 

hl ~n ~nn";rl r.\1C l,r aWul 1 p:m:n! lfi~urt S3) • How-

~. t:l-..o((IJ~""'oid<' ... li.S.r~.f«l<r>O 

!k..n<IIooI< • ..-.l11< ... !tovtol<p> ..... 1) """' ......... ltll ....... ·• ,·l.;cUof ... _ """"'ll).Itmud dq»IiIo .. _,uI_, 1....tINIo"" __ blo<WhI'~iu.i'''_fIIOU~ 

1"" .. -.oooIro.:..., ..... ot>J"""""' .......... 'I'""'''' ... ; ....... ''''I'''''''I'~ GOII.,'''" • ...J MknIlI<>m<..,., (~I_ ~~,.(~ooJorf1f.,'bdr....t"'~O\Io: _'ud_ .. ".,"I .. """,,_ .. ~." .. \....,.~.....w_ .... oIhIt_ • ....t~~ ... 

'tdl~(I) ...... ~'I~_OIOI\<I 

~""'_"I.(6I~""~llkwol<po»­

"'~"_"""I""$IIIII.«v)""""",_ ... , __ 

po)oe<l ",t.;,nrJ..in6"-l", '::"'''11'''. (III 1qlriI1. 2012. 

I .. ~ I'"hlol.td .".."rnd .... n' 10. r.'~~ 

'''''''"''''"'sctarifrlog lhe l1l:I;"01",,<1,01 ""' ~,nO<J wilt"" ... ·.., lot I''''''''''' of ..... 1 <>It .... f.IOOd. 

1r.lnI(M. noil,ulen\o~l"gis~ ~llM"i<1c 

t:\OnIy "1,.d,nt film, d ... "..,. IN' iJI,Ir!l""'<'tl t'ot 

~oI'on«-tl ~~ "'" I'" fS(X.' ~, odd~oQ'" 1 .. Ilu.itd,oIung"'illl"'hr'...p,. .. 'l .... o6tos,I< 

1~"~.oWut 19.000 (Url\noerulenfflo. tto. 

P"'P'''''''' in~)l.n'''''' ""'"''' G)~ oilhi' Ot:t.."".. 

n"""r ~~ .. ,10. VoI.:b-r rW.I"," ruIo p" 

oily prohIbia. b;n,k,"II ~"'i'"" In"" "''8''1:'''11''' ~~or,.,-"'Jiri"ll"QI.-""flohipino,,, L'" ;", "".""""f;. '" """"S<O"""' otIIe, 'e"' .... sh"lwtlh. htdjle IIIrld <l< jlTivilie eqtHtyl\Hl<l. On A!~~ 19, It.. il<""d ~. datib,., ~dJ<I)( 

I "" Vok .... rut.:- rorI,;:"n ....... periOO. $I;Iling ,hal • 

biln~ !"/Ility hIM III<! fItIIIWP-)'I';>I penod pm-

,i<ltd by ..... ~I~ (Ih.:aa io, ur~i /Utt 11,1014\ ,~ 

""","led bylh« lli>;ml, Ii' fuilyron(""" ,ts .... · .. 1 ... ""'llroy$_'~ t~·"~"bvll"" 

Void<; "",, ' 

<'I'(f,!he itI"tls of 1>1 2 .nd ilsl~~t twml"lnrnl.li<lulll 

d<f".\Sill.. remain dl:\"atN rriJIII~ 10 V.MI ~"uIJ I\;r."(: 

betn bjXtttJ ha<eJ ~n hiJlo,lcaI ,dal,,}fl~h;rs w" h 

nomin.! inwmc and int</ru! fides, like!) fI.'flttlin¥ 

ihWlIIOJi" CIIntinuocl prefmno:~' hold ~c "nd li"uid 

asll't!. CumllCY tn <;mll:dioo ;ft<rtaStd roOOtll)'. 

,dlottlng ... ,Iid <k"~nd boI~ a! ~omo and ""rolld. 

R.lail rno,..". marl.-.I fund, ~nd ImAlIlime Ik~! 

eoolinucd !ocon!nat.1. Allhe SlIme lil'tlt ~ ("\lrrrn~ In 

cilC~lllIOrt "'as iOCl\:asing. n:iI:fVC hId.ned bdJ ;)I 1M 

Frocnli Ki."S<"I"t ~N dOCf(.cing; as I n:sIIll. Ihe monet~f)'m;." ~hich ilC<luai lo 11K: ium url~ I"') 

"'". <lR.I).:I KoosI> ........ "'r>oolort ...... ,,_ MI (7) _ .. ,.,oD......,. __ f...,.brlRA..-.lKo."'~ 

~>I_-u._ ... I1. ..... 
101 


3(1 Monctar}'l'olicy Reportt!) the CongrmD July 2\)12 

48. S=ndary' ''''''<l bOJ prices for ",OOka •• <1 loaM, 

:!('()7-12 

- "",-

,. 

• 

• 

• 

• 

""".·III< ... "'...,. ............ ~J..,I',lOl!. $"' ... l-... ~__ .... _,.,.". 

itfflls---~hang<d little. on m'Crago. (l'.'<llhe fil'$l hall pf 

the )'tat. 

Total aSS<1S <>f (he I'cu<:ral R<SCI'o'II d«rcascJ (~ 

S2.f\68 billion as 0[ Jul\·II. 2012, :>bout SOObiliion kss 

than.t (llecnJ ~r 2011 (table I), The smail <l<:atilt 

sin", D=mbCf largely (dke\! jo,t,~1 u~o( ~rclgn 

OOItl1ll bant tiquidity n'illp:illnd declines in the net 

1"' (rO~O ho din~ of 1M Maiden Lan. LLCI. Th. 

composition or T .... <U,y ,.";,,,ity holdings ""~nJ!C1l 

ovcr tke ""0'''' of tbe !irs! half of tbis )'Car as a ""oil 

of tn. implemont.tion of (he M iii' A, of Jul)' 13, 

2011. tho Open MarkO! I)",k aI tho Fcd.ral lI.esen~ 

Sank "r New York (rR BNY) had purdlased SlH3 billion in T",asury OOC\Ifitin "ith fI.'!naining malurilie< <>I' 

,-_ .... _-

I , , !, I 

1t90 IIollI ~ l<IO:! ltOO m. lfIOIl 1II10 1011 

"""llot ..... ...,. .... """" ....... J""IJ ll~ "....-.0""'---'" 

,. 

'" 

• 

• 

" 

SO. Ik.1 """·fUII r .. """,,,yi<1d IIId 12·,,,,,,u" f""""," 

e:winp-pi<enliQh Ib<S&P~. 1\m-:!oI! 

" 

, 

~_'111<_ .. ..., ............. _X1"n....,..,.. .... J." '" '0.,- 11-,-........ _011.·. ,o., .. T--. ...... Ita .. _ ... ""')~~_ 

S1.uo<T _,,_·,,_a ....... _ 

61030 )"ta~ and ~Id or ",dcnned $2~3 billion in 

T",aslll}' 5t<urilie$ with matu';ti., of 3 )'ea~ oll,'$s 

un(\« th. MI':I""Tolal Fcdmd ReSOI"l-'eholdings of 

8~'(1l")' M RS incrt:&<! ""'-lUI $13 biUi<>n a. Ih. pol;")' 

vf rtinvtSlin3 rrinciplll ~ylJlcn13 from a~n"Y d<bI 

and a£tncy M as into "I!"""Y M HS COIl!tr,,>ed. 

In II>< finl half or 2012.lh, F.deral R<fc,,~ <XInlin· 

ucd 1<1 rtdu« its ~pUSu", 1<1 fatilil;e" .>lablished du,· 

til. lld_ ... \tEl'" • ....,.".,..,..'ioSopl<mb<t1011 aoJ .... 

....tof'b><),oo<. ,lit (k,/< 1I><I~$lll Wlion i • .....,.,..""'" 

l.-y 

~_o 

.... """".od haJ »IJ II .. bIIooo .. ..,,,~ ... r,.... 

-. 

" 

" 

I • 

).11.),1 1

1 Y '1), " 

• 

• • - ~ i I t I I t I I " 1190 1!911 :!IlOO lIIOl lOOI :!OOO _ :!OIO 00,1 

11It ....... ~ ........... -.. ... __ 

""11,11I111l< ...... _ .... V1}(- ... ..,.......,..~ 

..- .. i><\P """'_..." .. __ • ......., .. ""' .. 

--""""' Cko"'_IlJoI-'-"""op. 
102 


I S<loo:=<d,')'''''.'' .... lSoT u..~ R........~i:<IbI>co< """' ,:20 ! ",_of"""'" 

r ... ,_ 

--r_'...-J .. ~_ ... _ 

.~- c-.I_IotM>,_ 

r .... ' ......... __ ,,...,......, ... " 

•• ... ~ 

. .. 

• 1 .. .,_· __ I_'''''''''IT,,111 

'" r"···""~p"'T~U''- 1.C 

s."...<I'7iIl<.I_, 

.. ~""",of Mo""" a.-111', \I' ..... l _U I~ood\lmto Io "" 11 U (' , 

__ 

....... ~ .. O\_ ._~"'" .. ........ """".~u: ... AUU) ~_Uf' 

s.-... ,WI-w. nT'-'1_ 

...... ===.._ _ ... ..... i .. ~ 

SoIo.'tN ...... .. r ....... ,......""" .. _ """"'"-

Il<oo, •• " ..... sg ... ~ __ o.."",-t_ _ . 

[,1=: ~Ao-' .... I..,.~ 

""""U: •• _""","~_ 

1.171 [>}! 

I!'I~'" 

'"~ 

111 ..... 

I." " 

.~ 

1,J09~' , "'~11 • "~ 

,~ .. .,,~ 

I,C<IW 

.~ • 

• ",. 

,~~ 

,,~ 

l\Srr« 

lJIJ.1IJ 

I .... ~l~ 

.~ 

1m'" • .m 

• ~" 

._ n. ....................... .-" ...... U'O .. _ .... _,, ___ ........ l.-UC_..-"'_""'" 

=~-:::....~~~;:,~:.=~.:'~%:.....-=:~==~ -

~ _oot 

... ---~~.:; __ ... __ ... --_ ..... -- _ .,-.... _-.._ ......... ~UJ ._. ____ ... ...,.,.."'_ ........... _"_-.... 

ing 

-Ibo ~p~ndill <:rGis 1<) SUI'!,,<,rI ,,,,,,iilc iMlilulmm. 

Thq"' r1foIwMlItinp r Maidrn Lane LLC. Maiden 

Lan< II LtC, and Majden Laoe IIILLe (ot;l'" Ih!ll 

wrn: CTt;\l(U \luring In( ",isis ~ a<'luirt certaio aSltIS 

from Th( lkarSte.msCUmJl;lnics.In.:" anJ Amcrio.'-.an 

S2. NOI fl<>w> ,,"0 mu~ f",""'. !OO6-

_ 

12 .. __ ... 

__ "-..0)-1<»_ .. .(-- " 

• 

II " 4 " • • • Ii 

" • 

• 

-_ "'-'" n. ........ IO<.IIl 'l<,jl ... _"'A,,-t .... J.I>j '!Io<_ ... _ ........ _-' 

~-""""--

In(cll\ j<) niil Group. Inc. (AlCi), to> lW(ljJ lho dltor. 

drl!yfallum; of lh.:m instilUtlons 4t<;line-J. (In 0<1. 

pnmanl)' asa (t,nll fa~ sakoand prioo~ I""l)' 

m(nlJ. Of nOle. (II"OCC(JI from Ihesalcs of all "r lilt 

NfO-,mins an<:1 1 on lilt Mai,1en Llln~ II LLC porIf"lh' 

---.. 

'" 

" , .. 

~ _ lNI __ 1!1"IJ lOlO 20111 J,m 

1<"'1 5"· ___ r ....... _"'~ "' ....... ... _ ,_' ... _fl ~·\1<01<)0_ 

--
103 


32 MonOW}' !I:>licy Rtporl 10 III< l;l~ 0 Jul)' :!(lIZ 

in JJUlliIry .nd fc'\>nlaryrnohlo:tllhel\.11")'lIII'nl '" Ihe 

enii,.., I'tm.ining oUI§Ulnding balJllct <)I' I".l't~;or 

I"an ff<!lI1lix J'RilNY 10 M"idtn l:tn~ !J LLC in 

Man:h, wilh tnlcrt.!ll l nJ .s:! ~ hilli<>n t1L~ lUIin In 

udd~ion. ~ ff\'II1lbe$llo:st'l ;,j~rl'(lm 

aiJ~n Lane LLC~nJ Maida! Lane 111 LLCi. April 

and May ...,hIod ill. ,"",,)'''''' '1, wilb inl •• ""I, or II>< 

enti .... maining OUI«lallJ ~~ bgJan«s ol,II< !IOnior 

loon! from Ihe RUNY~, Mai.kn 1..:1"" LLCand 

Maiden La"," III LLC ill June l'rocff<ls from funn.r 

~I ~;r1'l!m idt!ll.>o1lC HI in ]un •• lIlIhkd 

""1"')'lIII'0' of Iho<'<luil)' i'<"'lli"o ol AIG in July A nel 

JI"lin "" 1110: s.'\k of lhe mn:"ning ~tl in M.iden 

(;,on_Itt L.l C is likdy d~rilll! Ill< nt.~1 fc mOft h~ 

S:.ks of m~ ('Of lhe mn~inil\J ~~\t In MaWe" unt 

lLC ~h~u1J bt: ComplClo:tI byl/t<: ... J I!f Ihe year, boJl' 

r"", l'ga\1' "''''IJ m~y lak. l"nll'" I~ dc,f'O'( of, t..."'D~ 

(lII1.talliling uo<k. Ihe T mo AJS<1-1j,tkrtJ S<turili(s 

l'fll" f:.:i!iIY1TALF1" ,'ft jli~ ly ~''''CT, ,..,I\t:<tin~, in 

pj'fi, lh. finllMwrity<:.f. TALf 1''lIn with .InmJlfilr initillilcrm, 

On Ill< liability side of Ihc F«Ieral R(1C1'\t's baJ~!\IX 

~1tt<1, ~\X"!i(j hcld by <l<:1""il(ll')' in>lilUlioll'l d<:<;lined 

,D.:>ul $42 billiO<i in the fl(j\ half of 2(1]2, "nik f,der" 

RN:n~ n\'I<II ;ft cirrul3li<>n in"",;IIIed 1'QU¥1tJ)'.539 bil-

(i~n M I"'r! 0( ilJ "~I,~ng rrov~m 10",;u", lho: 

rrldincss ol (ooJs to drain mo:l\\.'S ,,'hen dOlnE >0 

becolll<1 "I'rrol'<,alc. the ~~dtrtil R<5<rw ,: ... JIlClOO ~ 

MrI<'$ of ,m.olI-ic40 "'''''111< "'pul<'hllS<' IranSllCli""s 

in""'tnJoll ciiglbi< <X)1Ia!~nd I)~ wilh iii C,'tJllt!ltlo.l 

list of C(lun~r"'lIlic::;. In the some ""in, lhe I)edm! 

R,.,.,,, .. iIl>o wnlinu,'d to ~lkr smJ/l.vllu.' tcrm d.I'>sil! Ihrou~h III< Term Ikjl<)S~ 1..,,41). 

On MD1tb 2\1, (he rcJcraJ R"",,1'\'ll SY<lcm ",k<h'(d 

il' :WII Nmbt~ annuoJ oompar:luw.audile<i f,nan· 

cial ;!l1lCmenl<. The oo~ral ~" .. repO"rtJ nel 

il)o.Ol)!l1<..r AxoUI S77llillion for Ibt yea, ""ding 

i).'Ctmher 3(, '2011. .kri\~,\ pnlJlJlrily from 'nl~1 

I!\COOI' on I«"IIrLiteS aoqUlmJ Ihro"~h opon m .. kCl 

QPtrati~nl n .. lISul1 ",,:uriti~ fe<lertil HJ!tn('Y and 

S~ MUs' ~nd as!: drbl "''Cllrilit;). TIt< Rc:I<fV< 

flanks l~n~c!1'OO qOOUI S75 billi~n or Inc rn billi~n 

in~rnltcnll\" in<om.to Ih. U,s. Treasur)' ln 201 \; 

(hOll"" d,w,'n jliglnly from 2\)11, Ihe Irltnsf'r 10 lite 

us. Trasur), "'malll<J htsloncallv VI''}'IIII»'_ 

InIC!fulti,nnal Oe\\!llIpment!l 

Til<' [ ump:an ~",,;Ii :.nd Ilon~ln~ crist5 wnlinotd lu 

~ni:<1 inlcmtllWn;li ~n l\ci;li m~rkets and fvlt4;n <;<0_ 

~cmj(: ... iiVity duri~g Iil<" ~m balf ()( :2012, C.rly in 

III<)t,v, "¥.-cr<.I:livc ~iM ~ tnc rCBanJ IQllterror.-

I'ffi in add~ill$ iIle crisis hy rll< ",gion'lleadC!'1 ",'nlribul..t 10 ~ <"'J>;>rat~ <'".ut.ng or fm"ndal S1~ 

1St\: th~ !M.u-··,\ n Upd.nl< on iIl~ Euft'll<'an IW:aI ~Dd 

Ihnking Oiru. ") 1I0"t'''''_ JmiJ onping f",'I;licaJ 

UIII'<'"olilly in Greco: ~nd lII(',..,a$<d C01ll.l11I.I aroul 

Ibe ite;li!b of Spani!li bltni;.s. fin:tnci~1 condil!(>n! oklerooted "Il'I'" ;~ lhe _<pr,ng. Fo"..i~n """nu",ic groll't11 

picked"r in th. first qll:u1 .. , ""llhi! >I<'fik1'llli"" 

I~y ,..,lkaC<llCU1rcrary [uI01r<, >Illd m:tnl d;ua 

pvinllo wid<$prc.d sk>Io'in$ in Ih~ !I<WIId qUllrter 

Rmi.gn linan.:i:.l m~rh:I~ nlllt b=. ..malile. !nnWI)' in 

Ih. ~m qua er, mtDUl1II!ut~ m:«ft'«l)llOlllicJata "cd 

S(\m< <J$ingol' Iclllion. lI'ilh,n H,e <Uru artlliod Ie Kn 

Iml'ftl\"!mtol in global fm,oc.al c~ndj(wn~ Tbii 

Imlll'\)V<ntml "'lIS ,..,w~ in ,""srringa~ 11K; bi>osI 

flt'lD rre";ous polq Dl¢/UU,..,S. induJi"l-I/t;.'ltlr l 

longt'r I~'m ",fil\lln~mg OI"MKlns. [aJed_nJ {lC'tl1,.-", 

and banlin~ IIl\'SiO'S io vulncrahh: l;urop:lI!I Ct!uotnes 

~llrroc,'d , EUI'(>-3"" k.<lt:rs n:<f1'Jnded (0 Ill< ",,'rs<n· 

Ing of Ih. cri<~ lrt ann01UlICln~ adJilivn"" mtilSU"" I 

i summit on June 28·19. TIl< rnarxcl rt'<\CIion "':Ii 

p;l"r,1'! bul short 4iffil 

Incrca:iC\J untt'nawl)' ~nd grrJICr '>'Ow lilhy him 

pum.d up Ih. roro:ign '~4n$" ,a1u, (If tb. dllll4r 

~bilUI4'~ """",nt Oft a 11~d<-... 'cighIM rn.~s tIjIAtn.ll a 

I>ro;W SCI of c~m'nci<s sillO< ,~ k,w io e~,1) l'cllniary, 

,""Ih moM of the "f'I'I~d"tioo UOC\Imn~ In Mar 1~i!-­

uro: )It T)'pical ,>f ~ri<>Js o[ fli~hl 10 >a[ety, tl>< d>Jlb, 

hilS al"!""ciol<J againsllIl'm currencies boJt dtpr«i· 

~Ied H~lllSl the lIIjlan* )"n for I))():<l of Ih. pI'riod 

(~g~re 55), Th. Swi>! rrane hal IllCNtJ "'11' ej;,).'I<ly 

wiilll"'" <lifO as lb. S"mNr.lion.oi Bank h~inlrt­

'-('(led 10 m"m!~tn ~ ... ihng f~r Ihe frolIC rdMitt to tho 

Dum\~ the ~""d ~u.r1er of IhlS y.:ar, "i~l-t'l­

~!~ty Ho)"1 ~nJ tlw d.lerlcrrlol;n_ ~~bal «x>nOntK' OU\-

10$ h<ll"'J rush gowrnmnH boItd )'i<Ws fl)!' Citmuht, 

GmnlD}: ~nd III< UniltJ Klng,lom 10 ~ortl kms 

(~~ure 56~ U~ w\JC. .laran"'" yic:hls on 1(1.)"01 OOrtdl 

feU ".,,\1 below I p,'fC<'nl, II)' \'l'nlr.,l. Sp.nlsh k""r· 

ri~ srrtaob """r llClmM ooll<h tme mort Ih~n 

250 bi:."ll p.linls bol'.l«n FrllJuary ,oJ JIlnrI dot HI 

tSC.Jalin~ cu[>""!/ml u ... r Sf\o1m-s public /UlC\."i (fi~_ 

UII: S7~ ludi.n SO\erc'gn ~""'j rlklwd ur IU wdl 

ove Ih~ porial/, 

Equity pri ~ ubfo4d ""line.! .i.gnilic~oll)' in tbr 

I<.'(ond~""n.r, mol'tW than In tho Unltrd SllIl"'" 

n.k es lumble.! in Iii<' n.lions at !he ,"11111" o! tbt 

<uTl)-lll:3 fi~ ."d b.lnl'U'l~ elilis. nnd Ihe f;lil in val"", 
104 


)4. U,S. doIl.,lIOOIin.J =ban:. r.l<. """'" ind< •. 

2W/-12 

'" 

,. 

". 

,. 

_tw_ ..................... ,_ ... _, .. ....,. tw .... _ .... "'._.w, 11, ltll tw __ •• • .,..w .. ' ...... 01. _..:.:-.. , __ "' .. US __ ............. " ......... oI .. __ l'.S ........ __ 

1lI<_ ..... ,_, ....... ,,-. ... _ ... j,.,.~.~ _ 

........... _U,S ... "'"""_ ....... s:..'",,, F-oIm! __ -. s.-.. "'_ "'0. ~ r.."""' ..... -

from tlltif Milrcb r<akly,«s mQrc than 10 pc'l'CCnt 

across th~ ad"Jno:d romgn «",nomits fA FFJ~ (fi~· 

UTe ~), ThlSrall"'<UllHrnuat«lt<w>"rd the rnJ ofthc: 

second quarter by the pMltiY( market rea..1ion 10 lilt 

Jun. lummil ~uil~ markelJ in Ihe EM& .. ere Ills" 

m~,kodl~ down in Ih • ..cond qua,k, (/igUrt 59), 

EUfOl"".n oonls faced rtn ... ~d $IreiGC:S 111 m:.nt 

moolh, In G= ~ft .. incondu.i,~ .lc<lion! in <"I)" 

Mil)", dcr","1 ""Irto ... ~ rrom bank. occckrll~, ,. ..... t· 

5S. U,S, doII .... ,bat ~' ,.." .piny <elc<tcd m:tj<>r 

<IIrn:fIcie>, lIlO-I2 

,. 

,,' 

,. '" 

'" • 

" • 

• 

" " 

... .., ll.t .... ..... .. • Iootwo "-l" _ r« _ .... .." 1II< .. __ .... __ .""".1IIIl 

__ ....... __ "' .... "IO ........ 

F_ ..... -

:16. 'l'i<1di OIl b.""btnlrl ~""'""""" bootIi in .. 1«t<>J 

aol,">I!«d r .... 1pt ~n ... , ~12 

-

.". n. _o\o.lo .. ,," I(l.y ... _ ... ....,. """" .............. __ .101) I' lfl l 

........ ~ 

IIIg coocmlJ Ihal <kpoSll fiw.1 ,,".Id ."read 1<> hank· 

in\li)'.Imu: in lIN: ml or III< .Uroarea, N.",~ Ih~1 

Spain had panl)' nlliooaliled Iholmubkd k ... &..,. 

Banki. and WIluld n""d 10 i"joel an addilion'! £19 bil· 

Iioo into lit< b.nk .nJ i" bolJin~ compan)' added 10 

unease """ullb. regWft •• \~nl.aIIy lcaJing \0 pl.lru [0' 

an I>fficial aiJ pa<.:kar; <>f ~r 10 (100 billion II> I1.'Qlpi· 

lmete Spanish banh Arr",IN:n.<ion """ut bank •• al,n 

w"'l",idrsr=d. ",ilh majorinstilUlioos in Ilaly. Ger· 

many, aod ","l'f8I other [ufll\"'<an <;ountries fLui";"!! 

<:rOOil ,"lin!» clo.>l\gr~de1 As a rtwh. [ufOp'an bank 

51()Ck prites ha\"t lumbkd sltlCt mid·Marth llij!urt (0). 

Al tllt..,me lim .. rtfie<:lingmar~" "itll-lof i=.oo 

S7 C'1,)\'<TTIII1<'1 .kbt .pre>di {or p<nph<n.t 

Europc:.n ~.1OO)..Il 

-- !l 

'. • 

" " 

~ ......... ...ur 111< ... -. ... 1<>_ ...... . Itt! ",-{" I}' 'l__ IZ. .... ""'*_ ,M'II. .. "!"I*_ I.,.,.... _ ..... tIor 

"" .... -.. 
105 


An Up tlale on the Coropean liscal and Ranking Crisis 

()yc,,!he .,.....~""""h>, lhe,rioioin 1"'0\'" "'''W~ ","jw • ....! .. ,"""", ~.d '0 .. ,.,IC-

",&.o.erl"igt> IlOO too U>rnl,t ...... ~-ban '''S 5<'0.100 

"""" httOj~iI'k3"t, I>tII "'" olt!!Inilnt, J"ky r~ L\le Ia!I )e., ,he orog<>O'6ditlkulbro,;" 

u.. ~ coo"h',,"" wi'h d" .. ,;"m~ <roIIOII"" (:<.OII(IiIiQn~ ~J lQ "",Ie fuo\!<nspr_e< b l .. c.- 110"" fin...,'" irulilolion! ""d. nonobeto( wor,· .~ ~\~. It\< luropt''''' c.n,rall!ao~ I(M)\ 

oai<"" in e>rIy ~n.t..., '0 0>$0 error. ",,,,dl· 

liotu. indudinS,h. ~n 0( '''''''1'''ar ,..Ii. 

nanrirlgto Nrtl$, >t>d ............ ","'en~ 10 

"",,,,hen Ii$tJ fIIb.nd ..,,Il00 ()..,;, ,..we 1arili.ic<.1._"""""',"""Iiw;u,,,,,,,,,~ 

ortd dLKati<>n ""I."';"" oi ,he dpll..-liquidiry ~ 

lingw"h I"I~"">I R."", .. , I.<I,,,, .. ! (uM",!! 

00>1 ........... >t>d d~ i.IIl .. """ ... I>onk$¥<I """ri"'.ed tO~ '"""'«I ~" .... 'In ~""""I oond~"""inl .. 11nt Itw _ .... o(.hisyea. 

t..~"' 1011. euro·aru ..,,""'it>to loIlowed 

Ihrwgh QI1,he;ro;ommlln"nll(l ~ (""""' 

"~"""on,,,,,,",_ .... w.~ing""'''' 

,~,he ..... qua<')' oflhe IinandoI ~ f(of 

",her..........m:.le l",,,!,,,,, "' ... 11n .... It.. c.n".~ 

g<M-'O''''''nlc~d. ~1UIl.mg,"~, pO. ..,.tthdd botid~ "hid! ,"'uC<>il!h< i_ ....... of 

,hl,d.h4 ""!.Ii~'!y_'!o,,, h~"'" ~ ... d • ",,(III<,f P""S';om wilh 'he' Lor(l(>e .. lJniQI1 (Ll~ 

"'.11 .... ~1/t'''';Mj'"' .. Mot>O!'''l' lund (lMllwonh 

IIhout £I7Q "'1;0", M.tII"I,ho $lm'" •• ,>t. "'..,.. 

ss. ~ ind.w:> in .0<10<10.1 :.J;0lr0<t\I (_'go <l.'OIIOOJ<>. 

.1001-12 

,-

.... ",..r .. 

.. 

,. 

,. 

". 

,. 

• 

• 

..".11._ ..... "" ",. .... -..-ftor __ ~ 

Jill! 1'.lO.! SU<tt: For(.-, T_ ""'* E>drote< ""11( __ .... 

....... _OOOO_lioromlXX_, ""_,ToI.)'O __ 

O" ..... (1I'lI'IX~aI, ..... ,_~..-....... """"""" 

'PTlII1$ ..... n~ 

.,e. ""'horilie< Illed ,t.. ,"',in& 0" ,h. tl>mb'r>«1 

Ie1tJi"llof m....;on. ~ (.cilil .... ,h. (""'-

peon finonciill Stabiliry I;>::~ ond "'''''fe>SOI. 

,he I 1>"'1"''"' SlobdityM .. '''' ..... '' (15"'1 "~'Ill t:SOO biIIiott 10 fiOObh,;tnJ lhty ><n~1 

"'" <dI<edui> tOr "'!,.>filing ,he [5.\\, I. odtlition. 

"'><len of the (;rQop of Iw.,..,. WIlt1tr'l'" . ntl w>O! 

IMI ~j"" pledlr'i about S4S0 billion n, 

,,~'"'..-.cintwth< IMj ... ~!.IIQUkf""a/A('~ 

IMI lO",bo/,"Ui>l!y irto'iI\E it< "'''''''''8 c.p><iIy. 

NoIwid'SliI1ding,n- ..... "'i\le>, e'ient> in 

~...t Sp;oin dlltrng u.. 'I>rioj;"II"''' h<lght. 

....d finand.oI5I~ (~ ,he "'1Jioo, ~oIO!iaI """"rtUttr'" L.....,.,. d "'''''''"'' obi) • ..,d rn.n.tOOllC<rnSyC'W lWeI' Lhel..",.;t,;1iIy ,,4. C"'., ",it (ro", 'II", ""'" _ .. >Ii<>t Ii ... rnutl· 

Iry'. irH:uI!<1"';"" p ..... ""Ye .... ,;""s in ~ 

'\""I.A'II1;o ''''''''.''''8 poIitd 1'"$1''''''"''"'" .,,,1 ,trung.1odor.II ~ h>r po,,;'" caII'"!;lor I 

,n*"~ioI",,,d,f>e5<'(noid LU 1M! pro. 

!I" ..... ..I«!~ r~m;.,g w ...... unalJIo '" r...m • rtI3j<>riry gtwM1'lllM'lO' >nd iIt'IOI"'" rourid 0(....,. 

LOot" w.><nt'ld 1.>1'1)_1, In lhe "~""';o.;f ng up 

'Q tho-...."",.) ........... withdraw'" '" tI"I><I!i!s 

kO<rl~kbar'"~l'\lIyill(J~~!dirttl''' 

p ..... , .. on tI, .. d<lll'l<'<!i< 6" ... ci.1 "i~"n. UIt~ 

"):ll'!Y' [he twO n..;r>< 1'''''''' iii .. hll<! 'II<'gt'1i~I..,j 

1 ... !«r><>d(U 1.""1 prQgrn1l~"'~ 

,,~'" 10 ro.m ,h. « ... ,~. cool",,", II'M""''''''' 

U"",rt>ffity'''''lOin, ~ /W., PQWt>Ie 

~, Aw<~"'" «JW1'j indc:< .. ro. <m<I'!'.~ rrrotI;cI 

"""""'"~ .'IX»-I2 

.!;-_'.-."'-.. , ••. c-"'_o" ..... -..,_:" • .,o' 3109 ;'0,0 lOll :lII1! 

,. 

'" 

'" 

" 

" 

, 

s,,,., ............ ""'" ....... ....,_ .... "' ......... MrI),;'O') Tlol.MoA __ ... .-..- _.01,,,,,, r __ ""_ .. _ ...... _ .. ~ 

r..to..w......N"'J''''_ .. '''"-._ ..... T_ •• ,m • ..., 

--
106 


R'negori.ll .... 0/ lh.,lenns (1/11 .. LU-t~1I ~ogr>m 

jo, C'l'KI'_lfSo..:llt"l (0/ ,1>0 0)I._~04 tllfoSt 

'f"'-............. 11<' ~ P"""""-"" ""'" "ill 

itt"Iet,," .. <fifli<:ull '''''''~ " ......... ~ I<> cOOIi",,,, 

~ n/lici.16",,,<,,,t "..tor I .... PI"!:''''"' 

1,.-6.1 "'e>;oiS;>Iw """",",,-'<I JJ\;ItpIyI.-.Spoin 

"' tOOCt'""'""",,~;u J'III'Wt finOO<)'."1I(I ,~".,.. 

rrI <I.hilit.'8'lI.>bd'oling.,.. ... ', ",","",oj \\'ott. 

""'"",Ii<" "";,if)' d.ditIltog. UI""'~"~"""~ ,'" II", n.... "'., tI ... I ... ~ .. oirqO .. :oI A< ..... mn"'llI. 

<l<>(\etro.~""""""'II .. SpaoIi!l18'-"fflI-

"~, II1IW'd iI$ ,",Oil i1<Idw:' <Iditir ''''8'" "I' j IO'kko 

""'gin and """" l/IeU>lon.,ys dcli<it I"'S'" rot 

2012 oIt.,r">oU"'''"",, lII"f:'~i:Ilions ... ilII ""'0"""_ 

..... lloriIh Me.....-h".lh<' '''W"''& btl:>! iI1 Ih. ~ ... ~t>l""'_'"""II .. .,..I~~ __ 

,,,,,""'-ronJit ... ,,,'M'" S"........,.l)IlIl!inuod I/) 

.. .;gh ,)II h~ ",""'-;.bitirr rrI <'t"""o! ~"d Iopl 

11><."" I"U"""'~ miltt;M ""', ........ tIlJOIU .. 

I'ublicdrbl< ... <kl be ,;groiflCOll1ly bou'''~ 1'1' 

Iimh..,lMrIk ~ fv, ,na<l.et I_~ 

... _<Nt in 10_111<' SJut"'" go.."'II'\I_' 

''''lV''''<'dl"""", .. ,fi,,·,,<..I~,,("P'O 

(100 billie", j"' .. b ..... 'goy>l .. n. Mo"M. 

,." .. i"''''<\>I''<"III<'d,~.iIlj:lOlll~ 

!til' MIkIatK'\' _10.1 h.we'~ .tft'CI <>I inmasirtg 

~"'l""""""do::bI_ IosI"' ..... '" "" Sr .... , no.""N ."d opIi.,I""", In h<liy.II...w ............... 'ed nil! 101 rUlo· ..... 

1\11, 1I1111k ... d 1"''''' in<l<."" I ... ",,1«Jed EurtJro<;n 

<:OIIrIIlit>,l()l!_1l 

,. 

• 

• 

....... no ........... ..,. ... __ 110 __ • 

'orr ;0:.._ ".l$IL ,_ 

<<I<I1IU>e '0 "",'" l.....-.d &"-.... <"1 fi><:II iInd Iin.>ncioI """"'. III. ",", Ju, .. i8·1'l ""'""Il, t U 1lIIiLi.o, a,"owroc",1 .,;.,t.;"nal "11',""-".,1"",,,"" Ihlt soaI, l .......... I~~,r,,"I ... iroItgt"'.tI .. '''(.>ef\-,· liI)II(l/f1Jf(lf>e""~l$.lIlallo;.ilht ... ,wr .... 

1i""""i>1 bad;.r"" (""Hi.,. 10 ,I,,,'<' 1y """Iollaliil' 

b ... J,;, Worp>:lO<llll ""l'<iIifIS .... ~.iW~ ~b(rj­

""'" 1<>"1JlIlO'I tl .. it Wt,k;~ >I>d 10 J><I","1e ,."', 

t..1Il""g ~11'00#0 II", lurop<9O\ kwhl!"~II8atlk in 

~'PI"'" '" G"""'~"' .... ~ .... "," I_";'~ 

~~ "'")\jl 1o~>Irn'II'<ltl!kIn rrlludo ~ilIIWe!. 

~"""""'" 1o;' .... Y"I'Ot..""''''''-'d. 

IIIf t.>kt 1."'Ile'"~' n ~ lW'"","iI d ... 0"S<'" '" Ihe ,,, ..... ...,, 0"'" .......... <r 

nukro '"~ 1."",eOOl1li<k:ur:~ iIlIII<' "'giort', .....'u ",oj it, jh~ _ .. nab<hIy u( .« .... ,Mgr, 

fiA.tncft.1'(>Iiq ""'_~~Ihell~'" 

""!"OW lhe ~1iIy,,( 00II ... ",.1 rum ""MI, 

I",~ Ia>I ~". Ole ",ppurl",,&oI<U"o'O ~,"ofu'S!(l< 

IUIt'fl"'l" b ....... but ,i<k; '" Ih.",ur;,yrrl """-

l"'Iio~~tn~""n.i .. III<'It,#",,_iIb<) 

h,," W"f' Ill""""" t<:UIIOmic p,h "nd 

iI11jl1_ O")tJtr*lit~."" ill II .. moll .u\<lml!il= 

ruoJO"l"'" """', '" l""r ",ode~."'"'*" ittcM Mr, 

ooIidollioll~ ~ ...... k:ofJ8f1lt<nl, l'IIf>:>-arc.lIXlli<)-

"';01: ......... 10 t;/,hli'" *1 .ff . ....... ""'''util...t 

(...--.at\: In kill" =<~'-IOO(.IiI\'''ci;i, ,.,<1 fis,;ol 

int''lI'>l''''.on<l "~"J\3l~~.I<)~"" 1)1, , .... 

it:na!,,rlll<' """""M)' ,.,.," 

ri>k 01 dtf.u!t. I~' CDS pmn,um, OIl Ih< dobl 0/ 

mlllly l:trgt bank< in £uror< b .. ~ ns-n ,ubotantiolly 

I ~¥"n: 61 ~ while iss .... "ct <If un""""",d b.>nk cldll. 

wInch h~d r=louslyrowvrf"lld. h'" falkn NO''';I!\-

"""din!! lbose M>'cll>rm<:nlS. funding mafk~1 SI~ 

h ... "'main.d .. laIi,·,~) mlll<d ... mlllly bonk< 

~ (lin'" fromlh< Eu""plcrn-Ih<.ysl"", 

f~m d II) tho F.CIl""d Ih. 'aJi<>nalcentr:l!!>anh of 

1n."U"'" ..... "",,,,ber <l3t~Ih-e' lb. in«.bank 

market<. r\ "andan! =u .. of I .... C<.\SI of this inl.f_ 

ba1t~ fundi'l!- Iho ,mj"llOed basil spreJ<! from .um_ 

dollar swaps. ,,-:u1'ttl. ch~ at $hOl1t:T m~lufilirs. 

The f:llrop<'" fiSCld and hankil\ll mru ~"lll thr "<11_ 

It:Tof """,,,,,,,,ic ",,,,,Iopm.nt< in the AFt;,,- F.lfro-''''R 

rrat GOP w:u Oat in tho 61;<1 ~uarter of 2012 tiln"""'1ij 

• oontr""tion i~ lat. 201 1 Wilhi~ I .... wro ""'a. 001-
107 


61. fr<d,r <l<f>lllr ....... I""'"""n. f ... buI;. "' 

",I«IN i:uropo>ll """"\I .... 1011-11 

,., 

~..wr.....,.. 

i.oIj 5<P< ,;;:- !a' ." 

--

,. /Om- .I\I< ...... _ ~!oo> ___ "" __ • 

IoI)rl.l(Ir!~"'IuoIO_ .... __ "''''''''''''''' 

--- """"' _'~_I' ___ .a-.I_,·_ 

JIIII foll lharrl)' in m;)" .uln .... bI. counlrios, Including 

11.0)' ~rHl SlX'm. ~'n"""", 0I1m cudnlncs, 01pocial\y 

Gcrmanj\ r..:rform.:d boucr. Mounlina financiall(nsions and "scalauSlmlY m.alUM 3P1"'3' 10 h_ fu,· 

Ih<'r restrained lhe euro-a!"t"oI (OO"<mI)' in lilt $C<>.)!IJ 

quartt,. ~! rvidtnc<d by d«linin~ ou.inm ronfioitnf" 

~nd ~ furll\cr drift o1f pUrfh.Rnll. rnanag<rs ind<~C$ 

inUl oontraclionary !(rril~'), 

1lc;)""mlC perfmmlll<."o: in 1110: oilltr Arr", hu 1:«" 

UnCl'Cn. In 1110 Unltod Kingdum, nal GOP «mlinU<~ 

10 foil ""Iy in lilt y.''''. and infulon 1'OlOllofl1l1h .. 

"".kn<Sl fu.1t<I by li~hl ~>COI ]1(>Iicyand ntpliw iriD· 

O'o'<r _["-1. from Ih • .ufO ."' •. In Jl1ll<'n. ("IUIllIII rost 

al ~ roOOSl poct In Ihe firsl qllart<r.ld«ling fiocal 

slimulus moasura os "",n os a rrrovtry from lhe shaM-

~ of paruwppli<s mused by Iht lI<l<l\lsin Thailand 

1:1$\ j"tllr. bul rro:nl data '~'tSllha! ucillilyJMler' 

.I~J in Iht sCN.,,1 quane,. The Cana<1i"" e<:ooomy 

<onliml<:d 10 t.\ranrl moJcrtldy in Ihe firsl Ihrc( 

1lWI11hs or In.. year .• upp.>rled by lolk! dmncslk 

"'mand and ~ milo.:nllabol ma,k~l, 

In mQII "f'Es. b<ad~lIC inftalion !'3IO- lIl<aslU"td 

on ~ 12-m(Jfllh <ndngc basls- «>nlinllN lodcdin~ in 

Ihe firs! half of IheY""T as Iht e[ecl. of lhe la,.,. 

,un-op in commooilypriN! ill (Arty 2011 Moo!, The 

mwlkr run·up ,n rot!¥)' pt'iccf lhat loot pi"", .~,Iy 

Ihi~ y.~r c)(~l'Io d ~ 1<$:1 maf~.d clfC\':1 on ""OI"lIl<r 

r<~ Ihough il hd""" k",p 12'monln inn"li,," n<lCS 

~b.lY< 1 ]l<1t"ll1 In Ih •• uro ~lta and in In.. Uniled 

King.iom (fill"'" I\l). Japan~pr<an to bo<"ll\(f¥1n~ 

frum s<v<rai )t.i'S of okftalion. 001 lap.,,1C9o: iubll.ln 

62. CIwoIC ,n NOI>OtM" pri< .. i<O" moj<. f"'~IY1 

~1e$.~11 

-

-. 

-. 

, 

." ~ 

'" __ _~_"""'''''-'''''''''l1t<l._Joo-'' ........ _ .......... _ ... 'l .• __ ~ 

--, .. ...... s.-..... fo.- ...... _ ... ~~~ __ ...... ~ 

~ ..... Il~~ ~ __ I1< )_ .. 1 _ 

_ ._ ........ ~~ ... ,c-I> .. " ...... .....,"" 

!'tmaill:! ~'(h< I ]l<m;n( i"flal.,n ",ill inlnl\lu-'Cd 

b~ Ih. 90J in February. 

~rIII ",,",raJ bnnlH"'<:d funl\c, tnci,mo1lCiary 

polity ;ltan~ Th.1l0J in<;1<.u<Xi11\c !;Ie of its 3SS'1 

l'ufl:htlSC$ rrulll Btl lrillion 10 f40 IriitiOll in "pril. and 

lben 1("1 V45 IriCion in Jul)'. The ECU, aflcr h:MJlI. con· 

JU<tN til< $<C()!Id of ils thrcc-Y""I!i>ngef-\orrn ",flnan<.in~ o]l<ulion, in lal~ Febru.uy, rut ils policy 

In1t1<11 rates 10 r<."COnll(>w.l in .arl) July IfigufdJ). In 

lui' Ju!\<. thc Bank of Cn~lanJ (HOI:) a<li ... l.d its 

6.1 t)If"iIoI '" 1aq:.,,:<1 mC«i ",I« ill ""1«1«l 

rodyar.::oJr"",w."",""""",,. m-l1 

-- - ", '" 

-

-. 

_n. ... "'4ooIya! ....... ......,.)~ II,))I!~ _ 

_ ... I00~ .. _ ..... ....,.,.. .... ,Iot .. _ .... .. 

_Il0l ...... _'" __ .100) ..... _ ... .. 

".. ............. t·_~ .. offi<lIII __ -"",-_ ....... _ .. --.-
108 


[,.t.,,,l<d CiJn~flll T .. m Rrro f"";lily. <I[JffiQi.u,· 

monlh rundJa,gain!" "'i.k~ ~I' ""IIW,lII. In addi. 

lion, in July, Ih~lIOf IntTl'"",d Ibc_oiv.: ,>( il'~l 

ru"'ila5<ll"ov~m r",m £325 billion I~ 07S hill.'D, 

and.I<>g<Ih<:T "il/i Ihc UK Trnsul)\ iwvdu"",,, ~ 

nt'W Funding for Ltrnhng SclIctn. dC1"~ 10 boIb1 

"'"dlD~ 10 hnU«bnl<l$ I!I\J fi,ms 

n~lt)VI"1I$ a disarpoin!il\t I""rformatHX ~, I"" end "r 

IUll"_r. Tl-,d GOP l!fI.l""lb n:1>,'"JKkd in \Jt,: firJI ~~ar· 

'<:fin most EMul',...'Onomic /It,i';ly 'll'l'n~<d '''fit. 

ci;illy briillly;~ <JlIn-gins ~. J~1\'d1' ren''C'Iin~ lhe 

rr<on"cc:lit," or "Uwly cll.i." d'll\~ b)' lh~ HO<I<Is 

in Th:tiliond f;ootlcmic ;f09ilb. h"""'~', "'ml;lIIu,d In 

.Iow in Chin. IlIIcllndia. Mom"',r, rtI.".1 mclirntors 

$U~ tbat Ih.)'J"" I,r cn'nwnic:lICt;,;!yd"",lrraled 

in mOSl 1],01 Ea ~i"$ i1l10 the i«<.>IIJ quarte, om;J 

1I<~""' .. illJ.$ omcUIIW with III< [urop<~Q <fui,~nd 

/'I:1~li'<i1511bdutd il'tW>1b ,n Chin._ 

[n China. rca[ GOP irl\.Tta.;...'ti al ..oout a 7 p.."f(I,!nl 

p;.oc ,n Ib, fil$l half ['of III< ;d~ dllVl'll from an $'iI r-:r· 

<nit I""" in The 'IW'ncl h>llf "r [lUI yea, Til< JdmId""," 

rrll<el(cl .. "ak<r (\em..,d r<lf Chi.,!>: ex"'''''.LI .. ~U lIS 

dorrn;sl;';: f~()f3, inciudiDIP1101k1lliini consumer 

J"""d",~ and ~h< n'Slram,nl'<t'l'<.'CU ()II i"\'t>lnl."~ of 

p.1:Y101lJ !,,"'mm<nt m •• 1S!H\:J to «>01 oICt'V1I) in lbe 

J"OJ"-'rt)' .l<Ct()l". Ma.'rN<O'Hlmf( data f()l" a~ ~nJ 

JUn< ,~llhal"'''<>4OII!1C aCl"'lY":a. rie\:,ni up u 

bli ~(lWiInl ~h~ 'oJ <'It lhe ~nJ qUirl ... , ",th gr(N)1h 

01 'n~!lmcnl, ",toil ~ and b;onlle.ro~in!! eJgln~ 

b,~b<, Ht~d[in.12·m"lllb in!l;u,oo feU ~o l~ J"-'r«nl 

in JUn<; 1«1 ~'-;lddilionru m(llknj,ioo in ~ rric.:s. 

AJ ilIll!11onary rm~m ea,,'<l4nJ ro~ms aboJ"t 

l;I'owlh m~unkd.Ih<-I'eonJo·j IMnk of ('h,no k\WcrtJ 

hankf res.a ..... requirrnKflll by 50 b.I>Is ))<'Inu;" bolk 

f,hru,), "lid May and Ihm rtJuct<l tbe benchltWk 

on<-)'''''' lending tal. h)o- 21 MJ.,S JI'~nli in .kine and 

31 bosi. I"'",I~ in Ju~ , Ih. ij"t ebani"'S in lhal mle 

sin'" an io=""" in July "r lui )~ar_ O ... orrhe ijfSl hoi! 

"r 1/10 )'(~r, 'ho rrnmin\>i waJ link: chan",d, on O\:t, 

a~nit IbrdIJ.U:u-, loJl il ~1'\'I"X,al.J iIbout 1 'h pmrnt 

"n. rod Im,*,,'OIhtrd basis. .LI lh. rrnminbi fo[· 

1" .. '«II~c d,,11ar up· .... rd ~aill5l {.'hin"~ "lk ... ,""jot 

lra.jing (l3rln ... 

[n India. =nomic SI","lh haslllso modcr"'.d lIS 

$1,,,,' rn'JI"':!:l (!II rifCaI ..,d )1",,1"1:01 ",fOTI"(IJ and f""" 

vWlIS milnclllfY tiJ;hI.1"U,~alk<l in~m.nl NOIoni 

,;,in ..... [OOlIbi)ilirs from Ib< counlry', IW;" ii;>:.J ond 

C"mntl«X(lUlli dtf"'l~ ,,'m. mdil Tilling ~~ 

""m(d (hOI [nJi.·, J\lV(rris-n dd'i rist> !.>iIi.., iii 

invt5lm,.nI·)tI1Idt S1.US 

In Mniw, """nom,c ""Iivil), rrboondtd bri<\:1) "' 

lltt lirsl qUllller !IS th~:wic"\t"'>11 _<r<:I<lI' I<'boonded 

fftlm ,ho: 10ullh",IIJI"<rdfOugh~ dQm .. l",d.mand 

gain<clll1'''Il<nium, ~nd .~J'O'ts 10 the Uniled SWfl"< 

picked up. J):""~n' ic i~dicatlJf$, he"t'-Of. SUUt>! 'hal 

1ll'O""h l\l(>d<r~I<..,j ,I>rot'<IlIoll in!h<' SO:Ulnd 4u~II<!- On 

J~l y I. Enri~ue Pdl~ Njcll>cf Ih< [o!,itutionill Rc'VI,J[u, 

!i~narr 1'4f\y, or PRJ, "00 Ih~ MOlltt.m l"«"ido:D\ial 

ti«1iQn. rr<>miAAg I" pto~u( llI!04'ktl-«ienled r.:fvrnu 

I" \loIS!or .l"U'''''"' JVl."'lh 

In 11,,,,';1, real (iOP ~trlllneJ b)' J11i@'1t;.,,,,,,t. 

menl and .... JlII<r·rrlal~d )'fIlbI<.,ru in the apkullural 

stelOl"- IncrnseJ >lightly in tt." firsl qualltr, makJn~ it 

Ihe fourlh oon>t<:uli,. ~u.n<J M bolo"'·I",rnl ~lb. 

IDJuSlri:.l por<)Il!ICI,on, whiclo hil$ "' ..... ''II' oo..'!I"'BN 

I~d sint\: ""'rl)" 2QII.cOnlinued to floIl lhf(\llg!l Ma;: 

.u~~o~ thAI ''COO~lllic actIvit) In Drilil 'rIlIJIflN 

.... ak;" Ih.,.,....,d Q~ ll.r. 

llffil]'ne infll!ioo ~oo-ally m!>Jenl(<.'ti in IhI: EM 1:$ 

rr~"""lm!JQ~"" food pritt )'It>sum and w"altor OC<,1· 

""Illle ~h In lld Jil"", loCb",!\, s<wral 0I.!wt '~n' 

lrill Nnks in 1M tM8111"'-' ~ monetary Jl"lic~. 

'nclud'n~ 1h.J.sc m 9r~[, Chile, [nd"" lnJon~i •. lhe 

l'holiM'lfl'"S, Soulh KDra. ""d Th.iland, 
109 


" 

Part 3 

Monetary Policy: 

Recent Developments and Outlook 

0ne a,)' l'oUt)' 11\\'1' tilt '''lll lf 

oflOU 

T" I'fllmotc the Federal ()riIn Mark<l Ccmm'II«'~ 

(FOMq objtxl;.'cS <If mUimum ~mpli'l)mo1<lt and 

rr~ Jtabilily,lhcCommillte mainl~in.d a la,¥"l 

I1In~ f()f the f«!mll funds r!l!~ of 0 10 '\ ptlWnl 

throughout lhe ~rsl half of 2012 (iilul<: 64~ " With Ih. 

if\(omi~ dauoluUtslinga s<'mIC'oIhlllllo"tt ""'..: ~r 

ro:mO!lli<: rro;)\«Y th;u, Ihc C:ommiuox had anlj,:j· 

pate,l, ~"d "ilh intlal;.:>n 5ftn as StIlUng at It-."ds at or 

belowlho!lO! oons"l~nl. ()\'tr the long run. "lin ilS 

~li1lU1Dry ,,'Umdal~ Ihc C"mmlll .. look !lopsdunng 

Ih. first h;l!f of Y1121Q ['Mid. ~ddil.)nal mnnelary 

a<.'C<>mmOOalion tn oll,k, 10 .. "",,11 ~ sl,"n¥Crcronomiem:o'l:ry and Iii II<:lpo"l\Il<' IMI inM ... "," . ..,.,...,. 

lam. run! at ... "",1, OOnsislcnl with II; mllndale, Thc"SC 

I[er' includCll knglhrnil\ll, Ih.lwnron ~f Ihe for.>1lfJ 

rale MUI~ "gardin~ thc Cummill""s t.\JlCC1a1ions 

II ~totl\benol' ... ro\tc .. llm_"'",, __ uf'" """O(G<>_,>(, ... r ___ 'S)'_"""'II<~ 

...... 0(11" Palmi ~ JI.aoUo( ", ........ u-.d-'. .''''' 

\;,.t. ~~s.. F'-', .... ,-l !/It ..... H),,('_. .... C""...,..._I1,..".,·III .. C._,..,.,. '11< 

.......... ofO'W'-''''''''''''''u.._~ofFO~''_b<n 

to Il, 

r\)l' I~ P<'I'iod o'cr "ni<:h IX(In('lIli~ condili\'UI "ill 

.... ruDt .,'-«plNnall)' low k\o\.~1 for th~ fClkral. funds 

l'lII<; ,'(lOlinuins 1110: c.mtmlll<.""·~ maturity '~Icn>ion 

l"'''Il1''m (MI'I') Ih",ugh the end or lhi. ~ar ratll", 

than completing th< rr"irBl" in Jun. as l'fCy~~ 

....ncdultd, rt"lining its t);iSlin!! )X'lici(-s rtprdin¥ lbe 

(tin'"nlm<nl Q{ rrill<ipal p.ymcnts nn 111,'1'1>1.1' ~"rilits in agcll<y-suarlllllm I11()rtgall''-b!w:kt'd -.>rilits 

(MilS) .• nu wm,nu,ng 10 rtUl"'Si IItt JYIICI>.'IIs 01 

maluri,,!! Tl'(alury ill:\;uriti<.'S. 

The infQfmilliun rt\';....'t<J at the hnllar)' 14 :!S 

!!I<'<lin~inJic.ltro Ih.1 U.s. <COMmie aclivilyh~d 

•. tr~o<lcd m(ldtraldj: ~hil<= tlQball(t~'lh 'rr""rtd In 

\leo $l('l\\in~ Uobor mark<l indical<m poinlrd 10 ,.:'m<: 

(urlh<f iUlI'f{wcR1<lnl in laM mark" t()..Jilioll~ bul 

~~ "':U i\laJuai and Ihc uocmplo)1\'K'nI ,Ole 

ftma,ncJ don,IN. Iioust'bo;tld Jp<.lIding had conlmucl 

10 aJ'llncc al • moocrale pact' dcspilo diminished 

gn;>Wlb m mil dispo5/lble inwmc, bul JIro'I'lh in bu!int:ss fI~<"d inl~SlrIl.nl had d"",~d Th< housmg 5<'<ICf 

ftmainoo d<prose.l. I nftali<.ln had bc<n 5Ubdurd in 

rectnl m<.lnlh~ and lo"~'r-!orm inl\.1llon t.pta4t;""S 

had l\"II1aln~d Slabk M'''lin~ r,," .. ipam~ ob>«>..,.:1 

Iholl f,nanci&l COIldilW!tl had impro ... d and financial 

nwkcl Jl,"",,' had • ....,d wm .... h .. duri"~ Ih. inltr • 

m<eliog ptriod, in part I>ocaus< uf III< CUI'IlfI'.n eMllral Bank', ([CU) Ih""'·I"ar rclinan<;ng O[l<r;lllOn. 

-

...... .,-..,..,. """""",:> "'""'.",..." .. ",''''' ... ... "" "" .... ... ...... .., ,~.. ,," ... ." .. " ,,1 om ro "." >'I' _ ::'001 ;lOOI ~o 10" :lll! 

... :<om _ 1100""' n._ ...... ..... 01) _". ..... ""'* ...... __ ,...oIlf1011r1l ,' 'l__ 

.1lI< (l.l'f'O' ~"'." ilpOo )~ r __ _P'"_'''''_.'~''''''' 

~, l~oI .. T,..., ..... I<donl~_ 
110 


4() Mollctal)'Policy KoJ>Oft to the CongRSS 0 July 2012 

Nonetheless. panicipants eXpoc1ed that global financial 

markets "'Quid remain focllStd {)1l the el'O"'ing situa_ 

tion in " urope. and they anticipated that furtlle, policy 

efrons would be required 10 fully address Ihe fis<:al and 

financial problems Ihert. 

"',lh Ihe =nomy facing conlinuing headllinds and 

gn;n<1h slowing in St"erai US «pon maruts.. mem_ 

btrs ge!\C'rally expoc1ed a modest pact of <conomie 

grQ"1h Q\~r coming quantI'S. wilh Ihe unemployn""t 

rate declining only gradually. Allhe same time. mem_ 

btrs thought that in~ali{)1l w"uld run at 1c,~1s al Of 

btlow thoSt consistent with the Commil1«:'sdual 

mandai¢. Against this backdrop. membtrsagrwJ to 

k«:p the larget range for Ihe federal funds rate at 0 to 

Yo p;:rccnl. to conlinue tile program of extending the 

"'=ge malurity of the FeJ.ra! Rts<r .... ·s holdings of 

securities. 8$ announctd in Scplembtr. and to "'lain tile 

e~isting policies ",garding Ihe "';n''eStment of princi_ 

pal payments from Fweral Reser .... holdings of securities. In light of the<conomicouilook. most membtrs 

also agrttd to indicate Ihat the Commill«: anlicipates 

Ihal =nomie conditions a",likely 10 warranl exceptionall)' 1ow 1<\~ls for Ihe federal funds rale all<asl 

Ihrough late 2014.lo~ than had b«:n indiealed in 

r=nl FOMCstat"""ntl TheCommill«: also lIalW 

Ihat it is prcpart<l 10 adjUSllhe si7~and composition of 

its s«urilic:s holdings 8$ appropriate to promole a 

Slrollj!<r <conomie """""ry in a conlexl of price 

siability, 

The dala in hand at the Mar<h 13 FOMCmeeling 

indicaled that u.s. =nomic aclivity had continued 10 

.. pand moderatel¥ Although tile unemplo)'ment rate 

rem.ined ele'OIled, il had declined nOlably in =1 

monlh. and payroU emplo)1nI.'IIt had il>Cf<aStd. 

IlouSthold sp;:nding and business fued in.~stmenl had 

advanced, Signs of imp"""n>etlt Of slabilization 

.merged in some local housing markels.. but ",nall 

housing acti,;ty conlinued 10 be reslrained by lbe substanlial invonlOfY of foreclosed and dislres .. d properI;'" tight credil conditions for monpge Io.ns.. and 

uncenainlyaboulthe =nomic outlook and fUlure 

horne pr~ ln~ation continued to be suMurd, 

alllwugh prien of crude oil and gasolin. had increas.:d 

subslantially. Longer4e"" in8alion expeclalion' had 

remained slable. 

Many panicipanIO believed Ihat policy aclions in lhe 

euro are •. notably the Greck debt ..... p and lhe ECH', 

longer_torm refinancing <>pOration" h.d help;:d e ... 

slrains in financial m.rtets and reduced the downside 

'''h to Ihe U.s. and global <COllOmie outlook. Against 

lhal backdrop, "'Iuity prices had nStn and condilions 

incrt<lil martets impt'<l"ed. leading many II1«ling par. 

licipanls to ... finat>cial conditions as more supponi ... 

of <conomic gn;n<1h Ihan at tile time of Ihe january 

m«lIng. 

Members ,",,,'til lhe infOfmation 00 Us. =nomic 

aclivily as ,uggnling Ihatthe =nomy "'"Quid continue 

10 e~pand moderalely, 1I 000~"er. despile Ihe easing of 

slrains in global financial markets, members conlinued 

10 perceive si~ificant downside rish 10 <conomic 

aclivily. Members genmllly anlicipatrd Ihatthe =1 

inclt3S" in oil and gasoline pr;"'s ""Quid push up inna_ 

lion tcmporari!y. bul that inflation SlIWquenlly "'"QuId 

run at <M bdow tile rate IhatlheComm;lI«: judges 

most cons"lent wilh it, mandate. As. result. Ihe 

COmmill« decided to k«:p the largel range for lh. 

federal funds rale at 0 10 Yo polWnl. to Ititerate its 

anlicipation that=nomicconditions "tit likdy 10 

" .. rranl e.=pI;onally low I<,'el$ for the feokra! funds 

rate at I<asl through late 2014, 10 continue Ihe program 

of e~t"1ding Ille "'"<1'lIgc maturity of tile Federal 

Rostl'\'.-s holdings of s«uril;cS thal;1 had adopl«l in 

September, and 10 maintain the exisling policies 

Itprding the ,..;n .... slm"11 of principal pa)'m"1lS from 

Federal eser'~ holdings of S<C\Irilics. ThcCommill«: 

apin staled thai il is i'J'Cpart<l to adjust the size and 

compos.ilion of its StCUrilics hotdio,s as appropriate to 

promole astronger economic n:covrry in a conteXI of 

price stability. 

Urthe limcof lhe April 24 25 FOMC m«ling. Ihe 

data again indicaled Ihat<conomic acti';ly ":as 

expanding moderal.ly. l'ayroll employmenl had conlinued 10 move up; and lhe un.mployment rale, ... nile 

still elevatrd, had declined • little fu'ther. Household 

spending and busin .. s hed in'~stm.nt had conlinued 

10 e.'pand. The housing sector sh""'ed ligns of 

improvemenl bUI from a wry low b 'd of activity. 

Mainly reReeling the increase in Ihe pr~of crude oil 

and gasoline earlier this )~ar. inRation had picked up 

solIlC\\nat; ho"'cvcr. me ... ,.. of long-run inRation 

expoc1alions remained stable. Mffiing participanIO 

judged that. in gen.ral, conditions in dom .. tic <:r<dit 

markets had imJ'l'O"!d further, bul noted that in, .... 

101'< concernl aboUI Ihe so,~rtign debt and banking 

.iluation in lhe .uro area inlensifled during Ih. inlerm«ling period, Many U.s. finat>cial inslilution. had 

been laking stops 10 bolster their resilicnce, including 

expanding their capitall .... ls and liquidilY buffers and 

redueing their European exJlOOU= 

Members expected VO""lh 10 be moderate over coming quaners and th"1IO pick up Oller time. Strains in 

global financial maruts slemming from the sovon:i~ 

debt and banting situation in Europe as ... tll 8$ ullCtr_ 

lainl)' aboul u.s, ftseal policy conlinued 10 pose significanl d",,'nside risks 10 <CODOmic acti_il)' bolh here 

and abroad, Mosl membersanticipaled Ihat Ihe 
111 


in=ur In inn~tion """.1Id ('1'01"( loml''''''ry and Ih!ll 

~"l><cqUtnlly in~allon _IJ run al 01' ~k>'<.' Ihe ,al. 

1~'IlI~Cummitl ",jud~ II' be 1lI~ Ctlllji"'ul ",iln 

ilJ mandale. A$ainjllhi:s b.>I:kdrol\ Inr CQmmiUre 

1\I<.'IIllxn rtllCncd Ib<Nll«:li....,jll<l~m~llhal il ~"Id 

bo: aP('fllrri~lr I~ mawl.in Ih~ e.,i5lin~ ~lr IIOC<)mmod.ti,o SI&I1'" <If 1!WlI00"'1' plllie)l ln ('Ink"lar, II!< 

Ctmimill,", ~ I{I k"'p ,helargct "'0,# ro, liIr f\'d. 

ed fund, nU. II 0 1(1 '/0 I"'-'=t, to ~nlinU( lhe rrogum or e';Jl<1ldlngtl>e "'~!1l# malurily.lI Ih. froool 

I('s<n"'. holdini!$ \1{ SI-'CU1'iuu 11$ annl'ulK>-'d \.ul Sell" 

Itmbrr, and '0 t<!";n ,~" e.1~1Ij! i"<,uci", Itfardi/W lilt 

I'I'inl't'llml'Otof rrin~ 1'3)'J1I~l.l from r'(do.T.II 

RrJm" holdinllS ~f 5C\'Ufil~ TheOm!mitl ..... irfl Ih. 

f(ltWJro ~"idlll<X for IIx: largtl r«<nu (un.!, rate 

uuchllll#d al Ihi< mffi'"! M.mhc,s rmpl!asiJ\'d lhill 

tbcir fOI"l",rd guiJilI\<.'f "'''S coudili""ol,," e:.pccloJ 

<'!:llnmtic do •• llIf"l'enu, bIl, lhry !'f"frrred »djnS/ing 

IIx: (o",ard guit!aOt" <1fIly (If!<." rb,cy "~r< 1lU"" ""nfi· 

Jrnllh.r lh, m<dium'l<rl\\ twnom;'" OUltr.ok !If tbr 

M.lol/1atoulln<,ik ha than~ signille<tntly. 

0 .. 3 !'<tti"," IlVI', Ih( 1", .. n<I<J Jin~ up 10 Ih. Jun. 

l~ 211 rO Cmn~iog iruJi<;aln! tbll =001111<: ~<:1ivil~ 

was <~ranJintal J !IolI1I",,'hal m= mOOcs. piI~ Ihan 

... Ii<! in ,h. ) .... Iml"""''IlJ''''L< in lobor mart., ""n· 

ditioM hid ,I" ... n! in rooetlt monlh$, .nd Ih. uo""'· 

rloytncnl r.tl~~"'!1I<"If to hiM: nall.ncd QUI. Ilou..:h<)!d 

l~ndUl~ ~ I~ 1>:'=8'" ~ ><'!lk",1t.t w\\n 

nlto; and buSIness '",,,Stme .. 1 had tunt,nued 10 

aJl>ilntX. [)e'Sl"'to some ""~'ni ji~s or ml'"m~nl. 

II>< h""'Sln~ >«to, rcmail)fd tkpIt~. CQnlu""" 

rei...., I"Hallon baJ d.dined. m"tnly rcn 'C"o~ lilwer 

!'lito:< pf <l\IcIt oil and ~awlin .. And loog<'·t<fm in",,-

lion <xpcct~lionl rtmained ... tll a""no",J, Me'IUlg 

,,",f1icipbnl:!o~'rl'<d I~I fmallCl.! m~,kd. "\.""\'(II~­

lilt O'o'tr I~ "'I """ct",~ pe,l()J lind Ihlll '"''tSI<lr stnlimool was !llIttngly inQuellC<lJ by,II< dtl~ntj in 

I:b~ <lnJ '''IJert<T (>I" sktwtn~ ~!IlIC growth ;1\ 

home ... nd.~, 

In Ih~ Ji;culSi"" fIf "",.rur)· pOli<). mo)$\ m<'lnb<ri 

~ Ih"l l!tt outlook had dcteriowt.l loO~"'h.1 

rrliOw 10 III< lim< ~rtb< April n""-1i~ . lind tlul I~' 

nlf~:""1 d""'nsitk nib ""'rc p~l. iml"'f1B1ltly 

lDC:luJin~ Ihc fini\.llmlll~ io the <1IfO ~ ~nJ 

unt<rt;Unl) ibo.lIll III< do""" of n;col rtSlr3lll1 '" III<> 

UnJl.'d $lalC\, and it. <ffoct. \lit OWMmic &cll¥lly <M' 

lill mNiUm lem, i\$ a "",,11, lit< Cilmmillte dOO:~oJ 

Ihlll'l""lJiIIgliddiu(mai m"''''tal)' pclicy omImlJllJdatloo "oulJ be "I'(lf(I!'rillo to sur!')" 11 >lrong<! e.::(llIOInir II.""''''')' and to IIdl> enlUI\' Ibal ineill1011. over 

lime, ~·as~l. lo\ltl ,"OnJ.isl<n1 wllh tbcCommill<e', 

JU:ll m~nJ~1c. St«ifi;:ally. 1M C~mmillaugl\'o!d 10 

conllnu< Ill< MU' lbrougb III< mel of lh<l';U,;nsl~;;d 

or <nuil\ll lhe rrq:Tlll1l m Juno."" haJ br<:tt rlsnnrd. ln 

d~ing so, lb. fo.t<kl1ll R<5<TVI." ~-ill p"rch;u< Trc'ISllIY 

,,-"\'Urities ~'i h ~tn"i,n lllllllllurit"" 0( 6 )'0"" 10 

l(j )(111 ~nJ;.<1I ~{rWrcm It" tquall'1,vaI\lI: of 

Trt"Wf)' !J<'CIlrilies ';I~ remaming 1Il"lurit~ of 

.f'l"'"'Jlim~ldr ' )UI'S ~rlt$s. Thil (."OOlinUlllion ()( Ihc 

M( I' will l"to<'O<d alliboUl the JII/!\O p3L" :u had been 

•. ""ulrd I~ lb. firsl rh:!SC ,,(Ibe pNgnlIll. 

in""""ing Ill< Ferler><l Rcso .... ·s hokl ~of 10"111'" 

1<f1Jl Trt<Uury ;w<urilit$ by aboul S2(;7 ~iHit'" "hile 

r<:d1Xi,ng itt; hcldil\..u nf $bQrt(r-torm T",<uul)" <e<:tln· 

I;'" by Ibr lI!mI: ~t2I,)"nl_ I"" lhol dur>lion or Ihi' rmgram. III< C"IItniill<c dir«I.:d 1be Open Mar1:(l Orol; 

10 IUIp:nJ ,~."llrrenl ro1ky f rollin~ ~''I.'f m~lurin)t 

TI\';uuf)' S<1.'urillt; inlo DrW ~116 ~l autli,'n ("ltd 

i .. t.aJ pu,dlaot only 3ddilionai ""'JI<I'.lenn l;I'Curil;'S 

",ilh Ih. rna.d, of m.r"tUlt~uri!icJ), n, 0\111· 

m>u<:< o_\i"<'-"(.d III< conlin"~lion of the Mrl' 10 rUI 

d""Tlward j1f<"<!Ull' \111 k.ogor-torm inl~!O:$t ""'<'$ and 

helpm"'" b<\, • .kr linaneial ""ndirit>rn; mo ..... IOtCOltl· 

owdali"" 10 a\klilion., I~ U'mmill<'\' dtcid.d ~ <:OIl' 

lin .... rcin't ... in~ J'fi",iral ro)'mcnlJ from il! holding! 

of l\gtll\.'Y 1kb4 dnd ag.r.cy MAS in ."111;)' MilS, The 

(:Qmmlll .... ai:JI. • ..t.<:iJ."\I 10 kco!ptlte.l~'i'1 ,~nll< fo' 

lhe r<dorJl flllllll' rate ~I 0 10 '4 I","''''M ond tv rn!Iirm 

ilS ""IOCll"'lion 111m o:<:o!Iomk _d~ionl """" 6k<ly to 

w~mll11 <.U'I.'ptionall) low tcvdj (or Iht fctkTlli funJj 

'~16al4'a~ throup lala:!014. In II! !13ICmmt. I~ 

t::\'mm"t~ DOted Ih.t i\ "';15~ Ie) t.k< [unho, 

a.:ti~o as .lp1'f01"'31C 10 1""1ll01C $11QIl~' ,wnoml< 

«':0\'/1')' _oJ 5U,\1iIM'.,J jlll~tn<m in labVf m",k", 

wnJlti('Il, in B ronl~~1 Qr rn« Itilbi~I)'. 

T,ansram«;y is an OS$enu~ pnncipl< of m\>\lern ~n

I,at banking t«Bu;e il contribul<-s to thi." ~UOltbll

II)' Qr centriO! b;iOi(11O 1110 go ... rnrnonl anJ 10 lhel1\lblic anJ b<callS< il con .nhJ.!lOllhedf<i:lj"'n~~r 

",ntrlll t.;oi(~ in IICh.'l'ing Ibtir mllCro«"""",ii; tWjrcll ... l Tothl •• nd. lho I eID.'fa) R..'S<.,,~ I>nlVlJulo lhe 

~icli Nll$>ll.erllb!e apt(>U!l11>f inWm,.tion ""~m' 

ing Ibc_Jucl of m~<'tary pO~"1. I"OUCI"'Ulg ~ach 

m''-'Ijn~ ~r the t'OMc' Ihe U:1mmiU", ;mm«liiile!y 

n.ic;lSeS a stalemenl Ihal li), '-'Ill th~ I'3lwn.l]t (or II> 

polk-y ID.'<ision and IlOiU<!! det.iled minutes or Ihe 

m~lin, oOOullhm ""I>.'~j W .... Ushtlyedito.l Ir.ln· 

)O:rlills of FUMC mrclin~i arc rcl< .. ",d IP Iho pu!>l" 

"'lIh . fi .... ·yea,1Jj! I, ~II.-oo:r, be!!""'n, '" ApnJ 

I!, fU~"'~~_Io<,""-..r.~"."' ''''I'''' odotodiol"' ............. _ .. ""f",k,ol-.....&..a..r. ._ •• """"*'''''''''''.~J,..,..",''''''' .... 
112 


42 Mollcta!)' Policy KoJ>Oft to the CongRSSD July 2012 

2011, th ~"airman has held press ronfertflCt! on an 

apPfO.';mately quarterly basi~ At the prtSS confeT' 

eflCt~ the Chairman prtS<11ts Ihe cumot ceonomit: 

proj<cti<>1U of FOMC participants and pMidcs addi· 

tional ronlw for the Committ«'s policy d<cision~ 

The Commill« conlinued loconsider further 

;mprm=ent$ in itscommunicat;oll$approach in Ihe 

fi1"$l half of 2012. At the January metting. the FOMC 

rtleast<! • st.t ...... nt of its long<r.run goal! and policy 

strategy in an effort to enhance the t,"nspart!'lC)'. 

=unlability. and eff« ti .~ness of monetary policy 

and to facili late \\"ell-info1"<ooJ d«isioomal<ing by 

houstholdund busin=" Ttl< statemenl did not 

rtprtStnl achang< in theCommill«'S policy 

approach, but rather W1I$ inlended 10 help enhance the 

Iranspa ... ncy, accounlamlity. and cffectivtn<SS of mono 

etary policy. Til< statement emphasiJ,CS til< Federal 

Restr"e'! firm commit",."t to pursue its congrt'SSionai 

mandate 10 promote m8JIimum cmI'lO)'meot. stable 

pritts, and mooerale )oog·l<rm int<r<st ,"Ie~ To 

clarify its longer·lerm ohj<cli'"cs' til< FOMC stated 

Ihal inftalion at the rate of 2 ptrttnl. as mcasul'W by 

Itl< annual chang< in Ihe j"II"icc index for pmonal con· 

sumplion eXpt"nd itur(!, is most consistent O"Cf the long· 

er run w'ith til< Fed<ral Restr."·s statulory mandate. 

Whitt noting that the Committ«'s asstlSments of the 

ma~ mum lc>'eI of employment art ~rily uncer· 

lain and subj<clto revision. lhe 'tat.ment indicaled 

lhatthe eentralt.nder>eyof FOMe participants' currenl <SIimates of the longer-run normal rale of unemplo),ment is between 5,2 and 6,0 percent. It 'tressed 

Ihat the Federal Rcserveulatutory objecti.es are gen_ 

erally complementary. but when they.", not, ttl< Corn. 

mittlX "iU foliO\<' a baI~ approach in it. effOfls to 

return both inHation and emplo)-lOOIIl to Itvtls consislent \lilh itsmandale. 

In addition. in light of a decisioo made allh< 

December metting. the Committee pro.ided. "arting 

in the January Summa!)' of l'.conomi< l'rojectio", 

(SEn information about each parti<ipant', assess· 

ment of appropriale mooetary policy. Specillcally. the 

SEPind uded information about participantf esti. 

mates of the appropriateltvd of the larget federal 

fund. rate in th. fourth quarter of lhe currenl )Ur and 

Ihe nexl f",,' caltndar }"ar~ and over lhe longer run: 

Ihe SEP also ",ported participants' ""rrent proj<clions 

of the likely liminil of the appropriate firs! inc",ase in 

Ihe target federal fund. rate given their as .. ssments of 

Ihe ooonomic outlook. The =mpanying narralive 

11. TlooFO),lC""""""oflo""' ..... ..,..aoJp<>ti<y .... <fj' 

i.",_ .. , ... F..JmIReom<!toord" • ..-. .. 

.... .J..JmI.....,. ~potic)-_b'"'-

d.""rit,.d the key factOl"$ unMrI)'ing thOlt 3'lStssm<nts 

.nd provided some qualitativt information "'garding 

participants' .~pecta ions for tho Fewal Roscr.-.:·s 

balanct mt, 

fli Ihe Marth metting. partit:ipants discussed a 

rang< of addilional Sleps that the Commillco might 

tal:e to II<lp th. public II<tt., undmt.nd th. linloges 

bet~".n lh. rvol.ing economic outlook and the Fed_ 

eral ReStr .. :"s monrtal)' polic~ d<cisioo~ .nd thu! til< 

condilionalily in the Committ«'s forward guirlanoe. 

Participants diocussed ~4)~ in ~hich theCommill« 

might include. in its postmcoting Slal<ments and other 

communications, addilional qualitati"e or quantilali''t 

informalion Ihal could con''ty a StnSt of how Ihe 

Commiltco might adjusl po~c) in rrspon .. lochang<s 

in the ceonomic outlook. 11"",,,,,,r. participants also 

obstrvtd lhallhe Committ« had intro,Juctd Stv.-ra! 

importanl ",hanctments to its policy communicalions 

O\~ til< past )'tar or so: Ih<Sl: induded lho Chairman, 

postmetting pl'tSS confemtct as ~'tll as (hang<! to til< 

FOMe statement and the SlOP, Against lhis backdrop, 

some participant! notedlhat additiooal e~pt:ri<fICt 

wilh the changesimpkmcnted to date could t,. hdrfui 

in evalualing potenlial furthcr enhaflCtments. 

flilhe April m«li.,. Ihe Committco discussrd the 

rtlationship bet,... n til< poSIm«ling stat ..... nt, which 

oxpresses Ihe collt«io-t view of Ihe Committ ~ and lhe 

po~cy proj<clions of indi'idual participants, "hich are 

included in the ~ Thc<-1tairman asked lhe ,ubcommittee on communicati<>1U 10 conride, possible 

enhancements and ",finemenlS 10 the SU' that might 

heip darify the lin k between ooonorni< de",loprnontl 

.nd th. Committee, view of the appropriat. ,lance of 

menOla!)' poli<l' 1'0U"",ing up on Ihi. is:rue at th. Juno 

IJIIXling. participants discussed ....,ral possibilities for 

enhancing lhe clarilY and transpa"'OC}' of the Com· 

millco's ooonomi< proj<clion. as "dl .. the rok: the}' 

play in policy decisioll$ and policy communications. 

Many participant. indicaled thai if it w~re possible to 

constrtlC1 a quantilali", economi< projection and associated path of appropriale policy that rt!leetedlhe rol· 

l<Cli.~jurlgmenl of tll<Committ~ such a projection 

could potentiall)' he helpful in clarif)inS hO\<' the out· 

look and policy decisions a", related. Il ""''''~r, many 

parti<ipanlS noted that developing a quantitat .~ fo",· 

can that ",!leets the Committee's collective judgment 

could be challenging. given the range of their view~ 

aboUI lbe economy's .lrt1C1ure and dynamics. l'artici_ 

pants agreed to conlinue to explore way. 10 inc ...... 

clarity and transpartncy in th. Committee's policy 

communications, but many emphasiud Ihat further 

change' in Ihost communicatioll$ should be consid· 

el'W carefully . 
113 


Part 4 

Summary of Economic Projections 

/~. fols""",,~ mQIfI'1(J1 1ll'/'ftI'Wi us "" uJJm.l_ 10 Ih, 

m~'w.,~{ ,h lum' /Q :V. J(JJ~, ","'~" 1M I''''',rul 

0(1.- M,m", eo"''''''" ..... 

!n ronjij""ioo ",jlh the Jun ~ 19 20, 2012, Federal 

Op.n Markol Comnlllte< (FOMCfm«:ltn.g. """"iIIIp:d'ticipanlli-lhe 7 .... ",/X-'" or IIu: Ilo.orJ of Oo>~r. 

nQrS llId Ih. 12 prtSid<n" ~r Ih.l;'deraI ~ 

S.nks, .u of ~ bom parlkirmdn lhe tkli!;"""li0!l5 or 

,''' rOMe -submillcd tl\ci, owmmClI1J, "flUor.",," 

pa1\Itlpanl 's }ud!'fll<nl of Ilf',,",Pf'~I' monctaTY 

IX'lky, of real OUlp"' tlf'U\'11l. Ih. unomplV)'IIll'll1 ralC, 

illfi~li<>n. ilIJ Ih< 1:II1e\ fcdtr.l! f"odl rale [,II ~lch ~\ • .If 

[""m 2012 Ihru~gb WI4and Om'!he I~ngcr run 

The.<.. ..... "'"...,,1< ....... bastd on inf",,,,'ll<;m ,..,aibItM: 

al 1110 I"". {lr lh. l!I<t'Iinll"nd !".tiaranl,· illd~'idual 

li>"!IumJlliOllj gbou\ tho filClors 6hlr '" a(fret tCQn(lt1lic 

OUlWnlOS Tho: long.:r-run pmjcrtioni rtprtl<m cach 

f'II.,ocipan('$ jll<lgmon1 of the ratr IQ Which oa(:h _:m_ 

abie "'lIJIJ Ix: t.'pcc1w to ('(>II'~rgo; ('I\tT lim •• unJtr 

arrrornalf mO!1<t ar ~ rolic)' ~nd In Ihc ahlIolW< of furlber dl(>Cu 10 1M ewn~my. *i\P/lIVr" .. te 1l'I0Dtlllf)' 

[""hcy" is defined as lhe [UIUI\! rath of po.lhry llIal r.rlicir~ots de<mI mOSI likely 10 [~<r OUltOrn(:S fo. toonomit ttetivity and I1Illatioo tht btsl o:attSfy their indi· 

vidulll intt.l'M~i<.'!Is of lilt F«kral R.ser ..... j 

ohj.,,,,,cs of mLUPlUm ompll'Ym<nt Ind Stobie """""' 

o. .. rall, II>< IU<l:Sl'mntlJ thai r.OMCl"'ni<"p.nli 

submilt<d in Iun. i"d;':'led thai. under al'l""pri ... 

m"rtetary 1",liI;y. the pace cf t(:('n~mi< ¢,Ipl!lt$i(llll)'o\;f 

Ihe 2011-14 "",AA! "'Ould lit.1y conlwu<to I>< mooer· 

ate >md inH:IIKm wtouW !<:ltI4iQ lul;ldu¢d (SO<: tabk I 

""d 6gu", I), 1·".ticip.naju.d1l:C'l Ihal 1M gr<11'11h ""e 

of n:1lI JltIlU (\!)rnc:sI;': product ((.lOP) I(.Uuld pick" up 

graduollyand ill ... thr u"~mrlO)'meMi '~I' IIOOld edt< 

dO'iII '~ry $Iov.ly. P.mioip"nli pwj<clCl! thai iorl~ "m. 

as m.asurr<.l b)- Ih. annual <bonG" in h~ prK:r ;nd.>.1 

Ii)\' p<l'SUIIal <"'Ill'umplJOo .::Il"'l\(hlura (I'C~~ .. 'Ould 

runde,,,, I~ or 1:<:10 ... Ih. FO~t C.lonllCNtln innllli~n 

011;.'l:1h--.: of2 ('tfCI'nl 

Nshown;" fifurd. m (!$1 ranllil"lnt&)udll:C'llhal 

hig)tly """"mm,>dat,", mQ1l<lary j'Olicy """-' ~",Iy w 

be Wllfl1ll\tr<,!.,.., lbe f<lf't<:llSl renoo In I"l1icub •. 

13 p.rtk:ir:mli tboug/!t Ibal ~ .. 'OoIJ II< "l'I''''f''Ialr 

for lhe f,rsl in"",,,,,, in Ihe (81)11'1 frdo.,,) funds rot. 10 

l)Q;ur duriltji 2Ul4 <I. 1It1<1 A maJo)rit)' of I"'ni~ranlS 

judllCd Iha' "I'I'f'.'rrillle m"""I~ry polil:), wo~ld ill\'~l"" 

an e,\l''II';on ~(IM m:>lurity almllwn prosram 

(MEl') Ihrou~ h~~nd of 2(112, 

o."rnll. I"niL~panl$ jUJt!<"Ill!< uncrfl"mlY lSS(>Ci· 

lIMI ","h the oUllook for ",alat:livity 4nJ lilt lln.n]-

pioymont ral< 10 be unusuall)' b1Sh mali\'< (0 hl<!oncal 

n~nns, WIth t~ risIr.~ \\I:lghlrd mal1ll), tOlOllrd slower 

,'«)n(>m1C J!fO"'·lh aruJ II higbo.. ~n.mplo)'rn''Il1 r.lte. 

'T>bIo11 ~"",""'" f"I'iodi,m .,j' I'<>lmI R..-v. 1kIan! ~bm.oJ .~.11 H ........ i!onl( pn:;odonlS j,,,,, 1I'Ill 

- c.. ~~' ..... .. - JUt, "" ." -- "" ~I ." ~.ooIGIlI' I,''',.' ::'l",U J.~'o'-' tllo!.j 1.IIHj ,,-, .. ).$ ~~", .. ~ '--

1~ .. l.II 

A/'riI~ , .... ::.. t~ __ l70HI J.tlHI ,.''''~ !I .. n l-',.'" l-'"U ll .. l" , 

....... c ).\"..., l.u .. ", ~~"'" 7.1 .. ", 1.6 .... , ".1.' U .. O 

.\t<ill'l..,..o!oo U'_I~ ',.,," L".U j,!",'.11 HI·'! '-010"-' ~J"7.7 " .. u 

rcr ...... I~ .. I' tJ I.~ H,.v> '" 1.1"1." H"'~I 1''''1,1 ~ 

... - 1,'''..0 I .... ;..J 1.".1.1 '" U"'~) 1.' .. l.L I.),,:; u 

I: ... rcr ........ ' . 1.1 .. ,.0 ' .... ;0.0 1,0,.:.0 1.1 .. ~O I.' ,.: .. L.',,:,) 

.... -~ I" .. !II 1.1 .. 1~ u .. UI 1.'",1.. I .... ~l "ioU 

_~;..'":.!..~P,i..::-..:=-I'1.~~~.:;""..:.t""'...:.t:::::"=~;" ... ....".....,P<:1,l ............... I>oIO............ ""oooI_""-...... _"" ........ _ ... ___ .... 

... 

~,~!:".,'::~.=-...:~:.::.:;::'~..,:~~~-r:" _n.A ... ____ • .....-....... _ ..... r_O"'_~ .. ..,...~\lII~. 1.''' ...... -,_ ... __ ... ___ t._,..,..,I0 ..... ,..,. l.llo<""" .... ,_., .... >""_. _____ " .... .,.""._ .... """ " 1 __ .Jor""'f'n_. ""_ 
114 


~ Mon<1ary Policy Repor110 lhe CongIWO Jul)' 2()12 

Figure I CellluilCI.Jenrie; arHl r~uges of (,«)IIOIllie l)I'ojoc1iolls. ~'(l12 l~ ~lId Q""! the longer tun 

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115 


Fig"", 2, 0.'..,.;.. ... or Fo.\rC I"rlicip""ts' "",""",,,,,,ls of '1Ipropriat~ mv"ehry J>OIi<--y. JUII" 2012 

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oppr(;f>l'l_ Ol.-.rr wk)', '1>0 lin< ~ ill I •• ~ ItdonJ .... I. ,.t< i "", ... <'II'"'''' '''II' 0(0 hI 1/ 4 JI<f_1 

"I\I .. ~., ill .~ w«11100 <._~, I. April 211l1, ,''' ......... (lI"OMC port .. """", .'lo.I ""',..1 ..... , ... & ... 

I .......... ' . I ... "''l'Iiod.nl r ......... ~ _Ioi _ ..... 'lOl l . 'lOlil, "<111 1 .... , lOI5 ....... ""V"" ~, 3, , .•• • '" t. I. 

lI •• -.. po .... _II.-t ,it'd. bid ... ,,,, , ... ",h .. (ro.1ltIod \0.> , ... _ 1/ 1 _ poioM) 01 •• iod"id .. 1 

poni<lpoot "je<Ip", .. o(lloo.pp<oprio,.level oI",I>e,oqd IedonI f ..... ,....a' ,he eod oflloe..,..,iIitd Nndar 1"" 

\It_('''~'ru. 
116 


46 Monel&r}' Policy llc(lOTl 10 lh.l.'<!ngr& 0 lui}' Wl2 

Many !",n~'l"lIla"bo '''''''c.llhr un""rl .. iMYJU'· 

roundin.g Thei' proj\"c1ion, for inaalton 1<> he gt:aTcr 

Ih_q nonnal, bol 111(><1.'.'" III< ris~~ I<>;o.n:ll~'n In be 

broadly bioi_ned 

COIkIiliolnai up.ln Illcir ndi~idl4<lllS.<umplk'Oj ~I!oul 

~rprollrM~ TIl<ln~la(} ['CIiit:y, !)iI iran~ judgod th t 

I~ omy~uld ronllnul: hl(:lpand at a mOlkrat~ 

~ In 2012 . od 20H brfOftp!din~ up InlOI 1~_ 

r;l<.~1<>I1\<."'1I'll n/x>'.'t .. ;U.~nic;ip;mIIVitW is lhe 

kmj;Cr·run mi. uf "Ulf"ll JO", .. lh, The ()('nlriJ leroJaocy 

Oflhnr ""ojrtlnllli r<lr 1h< ch.mgc in ~aI GD!' In !Ull 

~1' 1_9 l<l 2.4 ~1\:"nl.I<l"A~rlhan in April. Man), pa" 

U"jpltlT' <hM"""ri""J ,h. '",..,minl ~a1A----<'.or>«W1y 

f~r hou~hold sll"ndi~ ~nd Ih. ~bot mark<I- -Il! h .. • 

io~ bc<-n wtak« than They h.d anTkipalcd in Anril. In 

Jiliiln, m~1 nOled Ihallh< worscninglilU<uiM in 

[ urn!"" "-as lo!aJill$ 10 a s.I,ywll<l'll'n in giobQI tton~mic 

jlI'IlI'lh and gte"tn WlIalHily in tioanci~ ma,l:ctl 

Q,m('im:d ... ilh ,-~r Ami ~t>mi$so~nt mQSI partb· 

panl. Io-..tl\-d thoir medium·run [lI'ljtttj~ni <If ro>-

"","Ie ... 1i';Ty .oum.. .... hlll_ TIl< (>;"Iralltnd.nd,-~ or 

p;onioipanll' ""'IO<llOl1> III' n;;iI <<OIWml\." JUO"1h I" 

2013 ~nd 2014 "''Off ~, lo H ptrc~nl and .l 0 I,' 

1.5 Il"r<~"l. rts/lf<li",\),. Til< <,<,",,:.II.nocnry fur l~e 

InnR<r-run r.l< "I" inet\:_ ,,( n;al G DI' .... ~ 3 l.o 

25 i'tr<:enl.lillie dw>g;:d (r(!m April l>:.rticif"l'l> 

died ... ,-«aJ ht.J..inJs 1II., "", .. likely 1<> iIQId back 

the PJI"" Qf econnmic: <lPJlmion fI>'« Ih~ fom:ast 

period, lnduJ "~ ,he dillicuh fiscal and finaJII:ial .ilu •• 

\i.ln in furop<. •• lill.d~d housUlgmlltl:el. tighl 

CreJilltlr .''''><cb."roo.-m.;md n>tal rnlfll<nl in lhe 

Uniled Slol~ 

('.,n,oslerol ";Ib Iii< J.",·n"lrJ rtVi';"!I' 10 th ... rroj.:ction! for .. 31 (jbl' [tI'O"1h in :!I'111."d 201 J, nearly 

an ,,"'lic:ip,mh m3fk.d up lheira .... ",menl, fur lhe 

rat. or unomrloym<nL J":micir3fll' proj«lcd lhe 

un.",plO)'menl roll< allll< enJ ,,( 2012 10, ",,,,run.1 or 

.~i,hlly ildrow =, hots. ",ilh a <:Clllrall<"rk....,· 0( 

,(0 'n :' rer=1.~-h.l ~iI!bt1" lIIan their A('IiI 

iubnussi""t I'articiranl, aoliclpolod grllduol impfQV<-

menl i~ labor mork<1 c6nJiliollS by211l4, bul nen so, 

they ",ncnrlly th<>ughllh31lhe unempl<l)-mcnl ,ale al 

lhe ond of Ihol jOlt ... uuld &liU Ii< ,..,u -.bow their inJi_ 

viduol .. timat .. or ilS lunga.nm lI<lMIlallr'~1 The 

c<tllnollen<lrncie. <Jf rarticipant>' f(lft<ll<I' f~r I"" 

u""mr/<lymenl r.1< ... " .. 7.S m KO 1"'""nlll1 !b<""d 

or :lO lllllld 0t~ U p<n:en! -.! lbr~nd or 1014 The 

"c"rallcnden"Y of partici(IIlI1\>' eslima .~ 0( ,b. 

lenK"r-run nonnal ,01,· of uOOlIrl<>Ymcm lluil .... 'uld 

rrt:VllJl U/ld<: the wumr"on of PI'f<'I"iale rnonel&r)' 

I'Olicy and i~ !b~ :lb!:<oo: of furlher Ih''''k5 10 lb. 

';"'m"mj· ... "l$ $.2 hl ~_III"l'-'tIlI. unclt~n!,"d ff\)fl1 

April M<nII':mici~~nlO rrojw<:d lhat th<l Pll 

boiI"«n lbt~"\Irr.:nt UfI(:rn~1 role ~nd IlIei, <"it;. 

m~!a of it> lung«'rIlI\ n~l'1!\lIl'JlrWOlJId bt~ in 

r". '" "-, }".'" K o~urJe ju.J~ed 1I1>l 1<<$ lim. ""uld 

be nred.d, and .lh" ~1 mOrt T,,,,rl'.tluld be n<e<s-

~bi:ar.u>c"f'h< l"'rsi~""II ... dwin<U;ml"dil\!ll", 

cronomi<: '~ral'lS 01I 

T1in",~ '_A anJ 3D ~r"'irk rklails I>Il lhc ;'~f!il}' 

o!'l"fli<:ipaDt>' vic,.., ftIlard,"~ lbe lit~ly ou'oom<s r", 

rul GD!' JfOWlh anJ Ibe untmp/<'l'TIl<'nl ral< ,n'n I~ 

next Ihltt l'u.IH~d ~'tnhe k>n~ run. Thrdi!JX1· 

~it", in Ihe"" rroj,;c!ions rtfl,"I;!! diffw:m~in pallici· 

I""!S' !mC!$lI1<nts or many f""IC"" iDCIuding """",. 

maT. motl<!ary 1"',licyand ill< oif~ OIl Ihuco..amy, 

!h. "nJ«lying m(lftlrnt"m in «:<lDomioo 81;';" ;1)', 1II. 

~rill"", Cf cfTcc!S <If" lhi: fl!<'a! ~nd fiuancilll i<i1""U01t in 

r:u~ lilt ~Ti"" ""th fOf U,S. ftnlWIi<y.lhr 

~~l''!l l \lr ' 1fU(lur,.j diskll'aliolU in 1110 IIIbIIr m~rt~'. 

and Ihe ~kdy <"tIlu!;on 01 emli! and finam::1al markC! 

oondilion~ C<>mpllrrcl ,..ith Ihrir Ami w.:mn<nlJ. Ille 

flng( M pJlIi<:iranll' f~llli,)r 'hc chang(in (tal 

GO!' in 2(112 ~nd !fill shined hfl"r, ... hile ill<: disl'¢r-

,i<m of inJi"iduailorttllSl$lOr gIll"1";" 2014 ... "" 

ab.)ul Undllm~, QmIi31.tnl ~;Ih Ihe ~()"<\nwanJ >/iirl 

III lhe dtllnbia!IOlI of fOffl'OSIS rOT economic. J!fO\'lhlhe di'lribianon of rr~jttliO!lS for the U!)crllpl.lymtmT 

'al~shin<J UPIlI :!01l'nJ 1"1) ""d. tOII~~ ~nl. 

in N14. As ,n Arr~, Ill. dj'I'¢!l",n of <>1I11tii11<-s [01 the 

longtHIIII "'!f III' oulpu, gnr.\'Til "'<Ij f4t11y nilJmW, 

g<nelililyin. ranI'" of n TO 2.7 ptrccnl In t\lnlM[, 

raniciNnl!' viN-Iab.lullh<'levd lo>lhi<h TlI< un<m· 

pI<l)'llll'nl flit, would rom'.Il!" in lhe IOIlSff ron "'~n: 

m~ Jjver"", ~ftCdin~. llmOlll Olh,.,. I hlDg). diffe"nl 

vic ... s on lhe outlool:. fur labor JUJ'!'I}' :.nd ,lit <lflICIU", 

Qf Ib~ w.", mll~"C!. 

I';nlicip.nt' , .. ~~ aboJullhe medium·run "uliO.,k for 

rnlIoIion WlIkr lbe aswmpl;",n of """"'mole moo· 

el,ry pol;;y ~ ... 1i1l1. chaul}'d from April "" .... ..,~ """,I)' all ~f lh<m mmed do .. n Ib.ir .... "'m •• ' of 

!loaJlin. inflali,m i. III< ...... Ienn, roin in~ tr' r=nl 

d«Ii .. , ;" It.. priceo of mid. <iii and ,"""I;"elll.! 

wm:<IIarl"" lb •• p""i(lusly rr<lj<ctod_ Alrno<l all p;tr. 

10:;1'""1' judged lhal both he:ul1;". and ""'" onnalion 

",,'Old ['eIJIaIlI subdued "'''' tbc 20 12- 14 ("'ri<Kl, ",p. 

n;"~OII. "I .. 31 or bdow the C"l!OII~ -flln 

,,").'CIi ... of 1 pt=IIL Some panicip,mts n,~"J Ih.1 
117 


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119 


inll,,;"'n "'l',,"La1ions haJ I'I'11I4;""d ;!ul)k:, .nd """..01 

poinlw 10 rtSOu= Jla(:k _od modtfal. intl'l'U<:S ill 

IIIbor oolllll'-'I1.llIli~n as 'IOum;s of n:~r"itll <'II j11'i= 

Spc<:ificalJ)" lile ",nlra)l""d.,WY of J"I1i"J'o'Inlf rrojc<:li<llli r(lr inn.'.,m, M 1I)I.1ISUI'I:d b)' Inf PO l rvic< 

ind<::<. 1ll<W«t oO'<o'n in 2()121~ 121~ I? I'=nl Mil 

"'lISb l1<dllll1~i"20I .. ""d 2OIhlljIo1.0J'l'" 

""" I Th. c<wlli I<ndol1cic< of 1.< km:<:1'iL! ('" rolt 

inti.,ion " 01't bro>odl~ lhe sam< 0; Ib ...... ro, Ih. head, 

U"" m'&S1IJO in 2011l1li11 2(l14. 

",~ 1,CanJ J 1) pro_ide: inli>nnal~'~ aboollhc 

di":I!l ~...r pankipan';' vi."" "jx,ullh~ O"'I<.~'~ for 

inl\~liou, R<lal"~ '\' Ill< ~nt~oomrikd in 

Apritlnr i""}.'ttion! for ~d i[l( in~~lion Ibil\,'(i 

down in 2012, rt!kclmi1l~ dc<linc. in "u<'8Ypri<:~ 

Th~ dl!lriilulioQJ 0( rarl"'I'",,,i JlMj«:IiolU fCH' bruJlin~ and ~/I ,"fi~tion in:>Oll 8nd 2ll1~ "'Ol"llishlly 

l(l'<~r In&n Ih<>s< n:f'O',,:d in ,\ prj! 

A<mdic:~I<J In O£UI< 2. ",<,>! rarticlJ"'lOI'i JlId~ th31 

~W<f'li,'nally low ieI'd! of tn. r.'\Icr"j funlb ralr .. oold 

",maUl .M'«'pn:u~;/;! bit Wltil lal. 2u14 In 1'"11JI:II' 

la" t<:\tn rwli";panUIIw~ghllh~1 il "ould I>t!l(:>fll'>-

pri_le IO.:(lm""'ntr ])Oli"" ftrmins in 201 4, "bile 

anvlh<r SU p.I1licil'ilnlS Ihoughl lhat Iho first tn<T<U)l; 

jp Ibe I~r~"\ (.!krlll fund! !'lIt,- MlulJ n~! be w~rr~n!<d 

~ntjl 20 I S luJ"I"T JlIioo), l:k,", p..rtj'lJllinlllndiraICli 

lho\lllw "PI1,vrria!< f<d<.TaI fund. mit aI tilt rod 'f 

2014 ""wid be 75 b;ts;s ~ou or IolwIor(kl"~r pand), 

>l ~ Ihos< wl\o JuJ~eJ Ihol no)i<')' liOcll WIluld nM 

omIr unl ~ 201 S lhought Ih. feJe~1 funds r.1tt ""uld 

h< 1'h p<r<tnl <M" """"I ~l lho <1l d or tlut I'"~I, M;n 

April, ~x p.lrliciranl' judaeJ lhal c<OlIomlC condltj.)oS 

""uld .... rrJnl an lK"'a~ In tbola'l<l f<"d<r3I flllltb 

rate In tltbtr 2012 Of 2(11; In orMt 1.0 ~hicvt Ill< 

C~Pl'II~"!t:llulolr)'nundate. ThOl1ill pJrliop.tntl 

Ju ~..:J Ih:llllw ~l'I'«'pn lo vAluo fo, the r.1lml fundI 

r1Ito \O\)u ld r~ngl' fMn III. hI J rcrwnl at Ill< end "f 

2014, 

All J'ilrlicil'i'oli "'J")rIW l<,"t!. fOllh. ullplllrriale 

lal#! f<dml fundj mi' ~Ilhc ""d 01 2(l1411lal 'Rf<' 

wcll hd"",' Ib,:;r e,h11l'l1<1 ~f Ih. vcl.~pcel<d I" PI"-

.. ~~ jn the lol1jl('l ruo, ESlumles Ii Ihe kll\!:cr-fu" lar-

#! f<!k11ll fuo.lJ r1IlC nutgc.l from 3 10 ~'., [Xrwnl, 

rdloo.1iog the Commillrt '$ inHalil>n bjc(liyt "f 21'"-

crnt ~nd f""rtiopanlf judp!rtnl:i :lOOUI lh< Iong.:r-run 

equilibrium """") ~f t"" ",:II f<dcrul funlls ral. 

~rtldJ1<l"[j abo rllll'k\r.l qui<lilJ[liVt inhlrma(i<)p 

un Iheir .i("o\11'<:l/Ml,"~ lh< ¥1'll'olfJI'ial< !Mil of Ihe 

I'(ikral Rm",,'s Nl;..n,~.<OO1, ()f the 12 jl.trlidf>;lnIJ 

... hoi< ;mw;:uncll{j of "'I"1'f\lI"l.iI~ mOll"~rJ f"'1"'), 

,nduJcd aJdillOll:ll b81:!n"" sh..,1 f"'l~ II i6~<d 

Ih.t Ih.illl'l!UllIl'lioru: illl'orpoml.d ~~ ,,"oJl!:lon 

IhrouJ!/! In.. <Ild of 2QI! (!/" the MEl; IIJlJ:! parli.,jr~nts ,/'III(lilion«l llJ.:ir rroaom;" rO~IH'II ' n.~' 

I'fOVolm or 5<:I:UrilicJ rutUllUl'l- T"9 inJitatod lhal 

I~ "'\lulu c~n'lkkf.wclt ru ... h~srs in t",,<""nllh~1 

In. «X,)"",ny did MI mako <aWfaa,,'Y~' i.n 

;mprovlflS ,..bot 11I'lrk<1 co~Ji ioo~ o. ,II Ih. ,"""nl t)( a 

siJPlifocant (kH.'riQI'IIli<>n in Ih< 0X0110lllOc ')\It,""", '" 3 

fUl'lhrr in<:n:lIJ< ill oo..''''';J. rim 10 I~!II ~I)oQk. 

AIIII\.'<I:III r~rt!<;p~n!Ja»U!1U.'J (hll th.Commill<e 

would ~a rr y "U' Ih~ nllfmldilll!iott "f Ih~ Nolan"" ~""\ 

a.wnling IOI~ principks ~J'I'lIlYIXI.u Ill< JIUI< 2011 

fOMC' """",ling Th~' i~ l"'ior'" Ibr fi['ll inC!'<Ul in 

Ihr kdcr:d funtUl:de. theCommillc< "<lIIkllikdy 

"' .... ,...;" .,.lin~!I<>1II< or all rri"dpdll"')'IlI'nl~!HI 

«<-urillt' in tho SYJ"m Opm Mark<! An.'"""l 

(SO ~). gnd 111>O"ld liko'y bcginm or ~O)' 

",-,uriws rl\l!Illn..SO ~ ""llI<Olilll< afi.(1' lh< filii rot. 

IDC/QS(.', ~iming 10 dim 1O the SOMA) holdlllg! ,t( 

agtllcy ~ril~ O~ . t:w:ri<Jod "f (Dttt 10 ft,,!: )'<ar! In 

t<1II:r.d, pamcipanu Iinko:J thl;r ptl.ferw.l SI.I'I dol<'5 

(or lhe lI(Ornt.1liuliim ~t"lll<ITvic ... , f~nho 

~f1lroj11'iat< limi", for lh. linl ,1Ir",a5c in lh< l~rgt1 

f<dr"d r "~ct.< r:<te. One raTlicit>~nt "h~ IO".,bl Ihal 

Iho liOolf '" Ih' '<d.raJ lund! ral: sI:t()lllJ ~w ",la_ 

li>tly;oon indicat,,j Ib~l Ih~ n:m"t:$In-.:nl of mliuring 

$truril"'! .h(lllW c~"hlll><! fo, 1I lime Wter "fI~If, 

Th" k,y r .... 1..., '''formlllJ partictpanl{ 'nJi"i.:IUl<1 

~WllCJlII ,..r th. 11'JII'I'(Jriat.< ~lIing 101 m~lrlrY 

policy jll<luJ~d lh.,'r judgmmts r<gardilllllh< mJXImum ..... 1 of elllpl<lYlll<nl, lilt o~t<nl 10 whkh " " ",,,1 

C\lfId!li~n~ IlJJ tIt,i.i<d from nd.iI"~l ~nll"' , 

cl~ anJ 1'~r1lC1ranIS' proJX~~no; of ,he hk.l~ lilli' 

hO~n ~ry 10 r<lurD "",ploymtnt and innatlOn 

10 Sut~ hcl~ S<>tnl! rarliapanlS n(ll,tllh.llh-'j, 

1W<IoS"",nll .>[ ~1'I'1'Of"!o11< monew}' polley ",I\ec!td 

(lit IUbpu pace of lit<: «>.lO<lmic .. 'jl.tnsl~n .nd Ih" 

{'Cl$illenl shollf.n m .W.galt demanJ Iltte< Ih. 

1001 09 m.'<,);SI,'n, lind lWO 'cmmrn!cJ Ih.ll Ih. !l<UIraJ It\1:I of (ho kd,ra) funw flII<"'a! ~l;rlp('mt'I\o'bll 

I>clow il'i hi!lorKai QNm, On<: j)i<r1i<jranl ~nlt$S<ll 

t()f[C~ln Ihat a f'I'\ItracltJ period of ~y acromm<'llaUti! m<WlrlrY pohq c.'uld leaJ (0 .. bttildupof riskl In 

Iho fin.lI<ial J)'jIOll\, l'ar1icip.lnl> ali>.> ncl<d that 

hecauS<.' lh< "PI'I'Ilrrilile Slanc< Qf """"'11~ roIicy 

Jop<nJs impvl'tlontly on Ihe "o]ulicn of "oI ... ri~iry 

and inlla1iOll ,"'er 11m .. Ilte ir 4U<'>'m(,'nU 01 '~"PI1~ 

pllal< fUlure ralh of Ih< r""end funds lol' ~nd lh. b.II. 

u« she<1 ""ulJ ,'hang< If <C(IlIQIIljc oondl i~", """" 

to e~,~ in 1In UIl<~I"'ctw m""nfl', 

JIg"'" 3.1; J<\ilib the d,Stribution of l"r1icil"'nl{ 

juJgmentl f«lal'litng tho "I'fI<'II'l'iat<.' \e"c! of lho l<II'g<l 
120 


S(I Monetary Policy Report to tho Coni"'" D Jul)' 2(l12 

• -" 

- " -" -" -0 

-, 

-. ~!~~~~~~~ ~~u : " --

-0 • 

-" 

- " -" -" -. -. -, ~-;;------..---~ , 
121 


-"-

." 

." -. 

-" -" -" -" -" 

- . 

-. 

-, 

-. 
122 


52 MOncla,y l'{)licy Report 10 tho CongmsD Jul)' :!()12 

M1 -. """'-- - -. AptjI __ 

L - --1 ,. ~. -•• " . • » •• •• w .. ,. .. ~ .. ~ ." ,., •• •• ," m •• w '" -- ." 

I ~_I 1- •• .. '. .. I.n •• •• . - m u .. .. •• •• •• ." .. .. ''7 ... .. •• w ... I'er<n, '''''V 

." 

"-,-, --, o. o. .... _~--~-

,. •• 

..... -

.... . "II; , ., 

•• •• .. " .. .. ... .. •• 

.... ... '" , .. . .,". '" ," 

•• ~ '" ~ •• '- ." ... m o. w uo !'tr<o.,_ 

, ... , ... '" ••. 'f.)- -II • ,., '" V1 .... ,., In 

f'tmoac ....... 

-~-

-. -. -" -" -" -," 

- , -, 

- . 

~ ." .. • • .. ,,' .» .. ... •• " . .. •• 

.,-... ..-. 

-. -" -" -" 

-, -" 

- , - , -. 

::l' 

'" ~ •• •• ... .. ,. w •• ." •• •• 

......... -. 

- 0 -" -" -" -" 

-, -" 

-. -. 

I' 

•• .. •• w .. , .. .. , . ,. ." .. •• 

-. -,. -" 

- " -" 

-- " , --. __ I. ~; '''''i ....... ''' ..... u; '" '" H ' ", .. ,

S(J1t.: no ""'" ~*"" (,,'" ",". 10 _ .... a. ,10< ...... <>fU •• , .......... ,"tbd 0(1"" .. 1<0<1><,.. "'" 

.. ,""""""""'". 
123 


rt<k11ll run<4 rate aI lhe end or .""h caltndar ye~r 

rrom ))12 HI :!I'll~ .nd ove, thrl'>ll$"rrun M \nt r~rtj,;,:'r:mlSjudgcd lhal =n~mi"<:(lnJitjQnl ~"uld ~ .. r-

,lInl mainlaimll$ Ih. culTtnllcw "-"":1 ,yi It..: fro.:r.Ii 

runds nil. Il\r(Iugh In" <nil oJ' :!fIl3 V ..... l on tbe-

~rrrupri"l. \c<.~ 1 r.r Ihe rNmlJundsmt:ot liIoend"( 

261 4 were !I)Q'" ",i(kly cli<p(rliOJ, ~ ilh II parlicil'"nlJ 

=,n, In. "M""I'riai< ~",I orin. rclmil r"nih ... 1. 0$ 

';'I"=OUl~'t poinl 'If w..tr ""J 4<,f IlI<m ""'-ll$lbo 

:'Jll"'lrrial~ ta,. as 2 I"'""nl Qr bighe, Th(1St ",hO 

judg<'d th:U ~ k>ngtr JIO'riod QC 'tr)'~mmod:lli'" 

mon,1ary pol;(), would bo: arrrorrial~ gcncr"uy prop;ltd 1Ill1lth< ulI<m~'Ill"nt rate would remain CorI~r aIxr.'e il! k>nscr-rull n04'mli k ... 1 Al Ih. end of 

2(>1 4 Inronlr.t>I.11x: 6 par1icir.mls whojudg,:d (hI 

ro1;.,y forminl ,h''Ilhl begin in 2fl!2 or 2013 inJ\<:81c<i 

thOi II!<: C<>mmillllCO "",uld n''l:d IQ 1<\;1 $001110 l«fI 

inll~li<Jn 11<"' Iho FOl>ICs loager·run ,'bjrdj"o( 

2 l''!1XOIlllJ II' f"""1\( l Ii>< in inJlati\!ll .~(l«"latimt .. 

Ne~, y.u p.trlkip3nl!juu.od Ihal Ih,,~ «11m" ((wI of 

ull<"'fUinIY~1 GDP I1;r\""h and ulI<miW~m''fll 

" '.1.1 hi,ncr lnan ""lIlh. norm dunng II!<: pl(vious 

2())'tan (!lgul( 4). " AOOYI half I1f 1iI11'"r1idrants 

jud~ lb. 1.",1 of "oomain(y as.wciakd "ilh I heir 

inH""on 1;""""<Ii 10 b< hightr .. "'~U, "hil. "",~n., 

eighl p"'licipanl< vi<v.~J u""'."rl.3inly :m.>UI irulalion as 

!>madly :<imih.r I~ hi:!l.oricaJ 1''''111< Th. rna," (scum 

<ilod .. untlerlyLlu: tho d<V'.lt<d ,,"=I~inly.t>o<.ol own'ItIlic:oUlrnme< Mtt Ihe~lliflSQl30d fin.ln<ial 

.itullion iu !;.,opc. Ih. oull{)O~ lOr tid 1'"1;.,y;,, lb. 

Unit.d Slol"" iIJIJ ~ ",oenI gl" ... do~n In global """ . 

nomic gr""'th. ioclllllinj1 tho p1>s.sibilily of • Slgnificanl 

.k>w.!own in Ch,.". M;" April plIrlicipanlS n"'.~ It.: 

difJiculu.. :lSM><rJl.d ""Ib fon:cu~ng Ih. !'11th of In. 

U.S. ewnomic """""y ru1I"''-'''M • linanei.1 crisis .nd 

~ ThI>ltlr<O> ...... _ ... ''''~-.._.'!'''',1I< 

.,....., .. !alGO~ ow~_"""_""'_ 

,...,._.,. ", .. '''''j'«lOdr""" l"l'~Y'11 A, ' ... .,.Joll ... 

_'Ioot...·";,.....,l"""' ... Il'·--.dlo--... .... , .. C<pr<t>1 ... ol_~ \k,_.,.-...ooJ"pI>< .. ,"'~_'o .......... _ .... y""" ...... J<Odiotrt'" 

~I"'I"""" 

T:toI< 2. A""",!!" htot<rQQl ~J"1"'" <'f1\If ,..""~ 

....... -,- :ni1 :'Ill! 

O" .... IIIDP' 11 .· !I-IO 

-~ '" ,,--' , .... __ p"'" •• ,, ~ 

13'1' 

!1 1 

,, ' !I.1 

,"<I."i<KIn IhOil uill"md m,"'o:.lly [rom n:crnl bi:!loncal 

t.\pcooo<C. wr.!«>mm<nl«ilbal;" 11M: allmn.lln of 

tIM: r.n.oci.l<ri, ... I""~""'" more """"rlain.bool It.: 

10,01 or P<ll.ntial OUlpul "".I II< In:n.d raI. of 1!IUWIh 

A ma,.,.-'Iy..( part;';pi!nl< I(J!Ofted Ihlll til<)' sa" 

(ho risk. to Ihdr for=m or ",01 GIli' gro .. lh itS 

WC1j!bI.J ""''l<ru the dooro"do and_ >ICIXI,din¥iy, tile 

risk, !o !h"n rrnF'1ioo, of lbe unornpiO)m.nl rAI. '" 

tillN 10 llle "psi&' Th musl fn:4""ollVilk.'Otifi .. -d 

iOUr«:SOr rnk ~=!h' .-itu.lion ill l:""'~ "hich 

m.uty parliciranl! th~".ghl hOld lbe p.:>!onli:<ll(l ~")W 

glc>b.ol <roJIomi<: 'ltIil'ily. pIIn;';ubrly "'tT Ih. n<~r 

Icrm.~nd lho liKal lilullli<ln iIlliw;: Uniled S!alt!-

M(lSI parti<ipantg""oti"u,d IOjudll" th.,.;,.u 10 

Ihtj, rroj«li"". fot ,nnHli"" ... broldly bolli.ad, "ith 

i' .... " bighligluing th. rtCtnl j lJb;lrly oJ" in~a jOll 

e.tf'«1a~on ~ 'l ""~' ... 6 .... ""rtiril"'"1< ..... ' lb. risb 

!o inflation :os lillN 1<1 Ih, d""ru:ido, ~ l>,¥,r numllo, 

IMn in Arril; ~ (>.lurk...r lilI:m nOled thaI slack in 

n:5OU!'t1' markt15 (."OulJ tum "Ul 10 be (!Il":.lcr I'f coulJ 

rut tTiOtt downw.rtl pl\'SIIU'" on in~.uit.>n Ib.n t~ 

.... ,ro anli,ip.1lin$, Two parl",ipilllt5 !I;!W Ih. rilts l;l 

inn", it," as woi~h"d 10 lilt "psidt. ill lil1nl ,,( ""('u' .. m~ 

,00UI S.f~ imba!anw,lhetulTtnl hig" ~a""om_ 

m\X1l!!ivI: ~III!IC<' of ,""",,'liff I"'licy, or Iho C.,mmjl1..,·J lIhtlity 10 &",,1;'..-1), reml)'o'< ",,!icy """'-'mmO<latNn ~ btn il bccornl:ll ~rJlfOpri~ .. 10 do i(!. 
124 


54 Monctary Policy Repor1 IQ lho Ceng"," D Jul)' 2Q12 

-t.:......." _ II J __ •• bo'u, GUP """,. 

- •• Apnl"""""" 

"-

.... ;lor 

-, ....... -

lI i&bot 

Il;p.. 

-,~ 

_ .. -

\\<ip...!10 

-

-0 

-"--o 

-" -" -u 

-u 

-, 

-

-

. . 

-: 

-. 

-u 

-" -u 

-" -," 

-. 1. ____ -. 

~ 

ji,ii,i;] ' \\'~\II 

..... ".." ~.,.. ,J.otlaII_oI" .. 'ti~' 00.1 , .. In _"""'" r"''''u.- .... '"" bo> ·~_I!", .. t .... y.· Dotl.1-

"" .. "I ~ .. _ "'. '" tho "' ..... 1 ...... ", ... bI. I 
125 


ForeGtS,1 Uncerlilinly' 

I~ f<'<>IIOIoic 1"*" ..... ptDI'i<l<od by U .. ""' .... ~vI,hefm," o(Cq,_ ... ~",~>t; 

uI "'" l~iII ~ ........ " &0" ... '''',m, ,b"...,."af 

m<>neIarypol·l·m''''g~~'~_~ 

1'"1>1 .. uod.",.n<J-.gvllhto to .... '" policy ~j. t"<",~deJabI. ~0W1>i"1)" <I\Iend, lIone 

IKojo'd ..... hOllo',,",. 1 hi' ...... nomic .... 1 ;I",~,,, 

m«Icls onoJ ",1011 N:Inlhip! l....-d l~ h<lr p'"d",," 

",,"""'KfmK_.,.~iI"I""1'd 

d<,cliloikM .. .;i1 h. 1"1'01 world,. .nd 11,. Nt",,, ~ .. h 

ulll .. N:t>I .. ,,,ca,t...:oIfent<lby~ """"" 

, ...... "d/>oIeIoJi"r"ml>-a,Id"""flI>.·I"'" "'''lIi''tlU'' 

>!;wavl_.'\" poIiry, p;ll1i6p'''''_Ii<l<'r 

,'-II til"" ,,10>1 il('I"~ 1(1 be the nlO>ll"",""':", , .. ,,,,,, ... ,,,,,, .. ,,,,,,,,,I><o!;"" in I",", projo-<1~"" 

10,11 ~ the 1lII~ «1IktlMli'.e""",bililrt., U,. 

Ijl.~IIo<><I 0/ theiI """limn". wm II .. p, ....... !>1 

"""1i>1""'CO<"IO«'I"f~I""l'I>I:Q/<. 101>110 l .. ,,,,,,,.rit,,, h~.""'''U 1Ii<I0<"ic>I >n'~ 

..... )uI~ ~"k>r.,;ast;,1I1<"1WlogIho>< 

"'po<t",1 in piO'll ,lbol'lal)'l't!IirrR'fK'l1> or.d tho", 

1""Ih"'-d loy .... 11'de<,oI R.......e 8oiIro', S!oIf'n 

,,<1'1>11<]' vi n"""'"&,'~ lheled<lol Opm M" " 

CommilI.,... lhe ",",*",ilIII..,,,,, '''''IP''''''''"'' in 

Ih"""1e """"""" "",.ocs.',:lbk- """"n"~Y 

;t>SOOoled »iJh I"tOOQrn'r "'"~ IOf~""'I>IIo. 

",,'I">"" p,niril""" pr<>jo:'r:u ,II ... mI sr-

""'_icl","1U<.111'PPlond ~~ .. 0>IlWf.,.' ",i< .. 

lIi~ Ii:\e ~,.,. l~" ..,nLloi <¥(1.o( ~"rtr. 

) pMrnl .. ><I 11"'''~1II . H It>r .. """oinIy_n<l 

"'sIM"!I~"l!is$iINI"IQIMI"I~ 

'" li">e f"'~ ",.11"" "'"" .,,,, •• 1 "'" f"'>i"<I-.' broMI\-" b.~~ lilt ",,,.~.,.,rqlOr1td in fAA 2 

II,<,,,IJ ~oI)' • 1"""aI.~iIy'~ .10<." 70 1""0000 Iio>l l1l:I""' (".{"IP,.".uI(I elI_t ""'h.,.,~ filOlQ 

4.0 flI""'OO" ;"It>. .,,,,t'fII ),," .. , 1..1 I~ .~ !"" .... ~ 

.. It ... "",. Id V" .. , .. ><I IJ tn 0 I""""'~"' til<'. 

lhira )""". 11 ... 0)n"~odin8;o ~~ r<1lo11· 

",",Itt' ir."''''''~ WI ....... .a ;"fuII!"" w<.,~1 be 

1.11<1 l.lI l""WIl in lilt aomnt "'., 1.0 '" 30 pe'. 

'""'" '" d ........ ood y~ .. , ....d o.g '" J.I l><tUrI4., 

Ihc'J,i"ly .... . 

11.<...... alit .... <"U!1dilions "''''I dim.~ ....... 

thUs<: (hat I"~ "" "e"'!1. """ hi:l:l"'Y' pa' l;op;..b f",,,,.1t ;UClgm<'lJlO ,., to ..... '""~, II .. 

u,.·fO;ri,1f)' "'l.Io;t~ t~ tl><i< PI~""O (Ii Nfli 

.......... "I!"''''' Ih.", >!nolle< "'.~ '" bmad'Y ;io1ib'..,'YI'*1If~·""oI~IJ<>...,.~iII 

II .. ~:l<;I"""" i.IiIh~). P>r!icip;ont< ..... I''''" 

~ iW)(rn,"b "! 10 """"he, Ih. risk> to lIot"i1l"'" 

;en""" -"'or"" 101M "l>oide, ... w'iJlInl.'d I<.lthedo)w~. '" ... bovadlyttaf~. 1M! Jj, 

1'.o:t1cip ..... )""8" 11"101"11,., .lIdo ,..~ i< """" 

1il:ely1O t",abooe '" """"'" II";' p'o;.o ... ",<>fll,. 

."~ ~~t'Iy 'IOta ..... I""'" il/elgm"'''' .1",,, U" 

UJ!I%(\;llrll)' on.llbo ri>k, .~II'n<JirJs .... -h 1'.-1i1i • 

1"",', P"';:"""''''''. u;,.u"nllll'" the I~ 1,( 

~ponl>' ~.",,"I tile moot b\efy 0VIC0>m .... 

I(.~ ".'"""'''1)"''' a ...... "'" Wlh the li;l;< 

""""ool.'d willi. """ ....... p<tlj<"diun "lbo, 11\;0" 

with d"""I"'~"'ft$ ' """""" 01_" pr~~ 

'" .. ~h,.01 iK>iI1Iy h11nil.1oio/t,'o.. "",1<><11< 

'" II .. I,u.", pJllh oI ,bo ~Irr.of •• >./o""~ ",.,h· 

iI"n 1<)~'" ",,·.noi.>\). 11M, ,"""n;>I'1} 

.' .... ~ , ... ,ify becou ... ...to f'iU\l<ip ... 'J;w.e$J 

"",.,,0(111<' 0f"1"J)p""" ~ (Ii """'"tory pr)Iicy 

,..".,orb .'~"""""r ""Ihe ""' ..... "., <>f ",;oj iICIf<. 

irr ""'II.""' .... (Wtfli ..... ~ t'("GIl(I/I'''' oXln!1~ioo, 

......... in .. 'Ooe;<l""Hd m."' .... I"'". """""'" .... 11'1 

<i'ht'I~".«<ting~ ,n..I~I"ndjr.o!' 

""""'I """''8'' Ion" ti,,, ", .... " ... "Ofd. 
126 


" 

Abbreviations 

AIleI' assel-badod romrnCftW Ill'rcr 

ABS 3$S<:1-baci:.;4.5tCUrilies 

ArE oo ........... J f~mgn"'""On~my 

AIO Arncr.c:Jn Inlcm.utm.IO,,' up, In", 

IjEA 1I~",.u of !'''mnrnic Anal) .... 

Bile b~nk nolJingoompMY 

SOE B,ok eM Ettvl~nJ 

1101 R,,"~ r.t hpan 

CCAR ('om~"", .. ~i. < Cot>itallln31ysil aQJ 110'0''':'''' 

ens ortdi( dtf~ul1 Sl'rllr 

e&:1 com"",rcial and indu_mill 

Cl>.tBS oonllntrcial mt'flg_v·backcd )J(I:uril16 

CI' c<lmm<rciill PJI"T 

CRE CQIIIm<rciai ",:<l .. t.1t 

OPt Jisf'.)sabk pmMai iJlI:ome 

lOCH Eun·ptln Central Rank 

EM I: ~ mar"", "''OMItI)" 

E&S <Gujf1lll<'11lan~ton"llrc 

ESM f;ul\lpcall Slubilil~ Mochuoinn 

H I l:ulOp<>III Union 

FOMe I'cdu:li Open Man.." Commin<'f: aI$.),lhc C<'IIlmllte<: 

rRBNY I ed~rllll("""rw Illnk M Nrw Yerk 

I'SOC hYonei.! S,.w,lilyo." .. i,l;hl COIIn<il 

001' goocl(llll<:<ticpnxl!lC1 

GSJ! go Wl1~nl,slXl'1loOrt<l.nl<rpri>< 

! JAR]' Ilu....: AITmdabk: R.Iina"", 1'f<lp1!m 

~H In'''"':.1","," onrl~r~ Fund 

11'0 !ru(,1l publk oif~"11 

M as III<'rt!>ll!...oo.:~..,J ItcunliC'S 

Mhl' m"I~Jllynl"'KmI'fOV1lm 

Michigan <II,"')' Taom"", lI..ulo~ ni"",si(y "" Mlchiga~ Su"~}.,,f C""'um .... 

NIPA nllio.lrud ,noome IUId I"OO\K1 act(IUnlj 

NPR notic<- of pro[lOS<d rul<makinll 

I'CP petl<mal.ulUumplioo ~~pendil~f(f 
127 


58 Mollctal)' Policy KoJ>Oft to the Congress 0 July 2012 

'" SCOOS 

SEE' 

SLOOS 

SOMA 

s&P 

STAL 

TALF 

Institutional Revolutionary I"'fly 

Senior Credit Offiro Opinion SU"'CY On Ixalcr Financing Tenns 

Summary of Economic Projc<;tions 

Senior Loan Offictr Opinion Survty on /lank l<:ndi~ l'racticcs 

System Open Markel Account 

Standard & I'oor'. 

Survey ofTerms of Business l<:nding 

Term A=\·8acked Securities Loan Faci~ty