Letter of Transmittal

Board of Governors of the Federal Reserve System Washington, D.C., April 2004

The Speaker of The House of Representatives

Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the ninetieth annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 2003.

Sincerely,

Contents
Monetary Policy and Economic Developments
3 MONETARY POLICY AND THE ECONOMIC OUTLOOK 4 Monetary Policy, Financial Markets, and the Economy over 2003 and Early 2004 7 Economic Projections for 2004 9 10 12 16 18 20 22 24 28 33 33 37 ECONOMIC AND FINANCIAL DEVELOPMENTS IN 2003 AND EARLY 2004 The Household Sector The Business Sector The Government Sector The External Sector The Labor Market Prices U.S. Financial Markets International Developments MONETARY POLICY REPORT OF JULY 2003 Monetary Policy and the Economic Outlook Economic and Financial Developments in 2003

Federal Reserve Operations
61 61 71 73 76 78 82 83 84 85 94 104 105 106 111 113 CONSUMER AND COMMUNITY AFFAIRS Supervision for Compliance with Consumer Protection and Community Reinvestment Laws Implementation of Statutes Designed to Inform and Protect Consumers Consumer Complaints Advice from the Consumer Advisory Council Promotion of Community Economic Development in Historically Underserved Markets Outreach Activities BANKING SUPERVISION AND REGULATION Scope of Responsibilities for Supervision and Regulation Supervision for Safety and Soundness Supervisory Policy Supervisory Information Technology Staff Development Regulation of the U.S. Banking Structure Enforcement of Other Laws and Regulations Federal Reserve Membership

115 115 116 120 121 124 124 124 125 126 127 127 127 129

FEDERAL RESERVE BANKS Major Initiatives Developments in Federal Reserve Priced Services Developments in Currency and Coin Developments in Fiscal Agency and Government Depository Services Electronic Access Information Technology Examinations of the Federal Reserve Banks Income and Expenses Holdings of Securities and Loans Volume of Operations Federal Reserve Bank Branches Federal Reserve Bank Premises Pro Forma Financial Statements for Federal Reserve Priced Services

133 THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORMANCE AND RESULTS ACT 133 Strategic Plan, Performance Budget, and Performance Report 133 Mission 133 Goals and Objectives 135 Interagency Coordination 137 137 137 FEDERAL LEGISLATIVE DEVELOPMENTS Check 21 Act FACT Act

Records
143 143 143 143 144 144 144 145 145 145 146 146 146 147 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS Regulation B (Equal Credit Opportunity) Regulation D (Reserve Requirements of Depository Institutions) Regulation H (Membership of State Banking Institutions in the Federal Reserve System) Regulation H and Regulation K (International Banking Operations) Regulation H and Regulation Y (Bank Holding Companies and Change in Bank Control) Regulation K Regulation V (Fair Credit Reporting) Regulation Y Rules of Organization Rules of Practice for Hearings Rules Regarding Equal Opportunity Policy Statements and Other Actions Discount Rates in 2003

151 151 153 153 153 155 155 156 170 177 184 194 201 209 216 225 225 225

MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS Authorization for Domestic Open Market Operations Guidelines for the Conduct of System Open Market Operations in Federal Agency Issues Domestic Policy Directive Authorization for Foreign Currency Operations Foreign Currency Directive Procedural Instructions with Respect to Foreign Currency Operations Meeting Held on January 28–29, 2003 Meeting Held on March 18, 2003 Meeting Held on May 6, 2003 Meeting Held on June 24–25, 2003 Meeting Held on August 12, 2003 Meeting Held on September 16, 2003 Meeting Held on October 28, 2003 Meeting Held on December 9, 2003 LITIGATION Litigation under the Financial Institutions Supervisory Act Other Actions

Federal Reserve System Organization
229 232 233 233 234 235 236 236 237 237 238 238 255 BOARD OF GOVERNORS FEDERAL OPEN MARKET COMMITTEE ADVISORY COUNCILS TO THE BOARD OF GOVERNORS Federal Advisory Council Consumer Advisory Council Thrift Institutions Advisory Council FEDERAL RESERVE BANKS AND BRANCHES Officers of the Banks and Branches Conference of Chairmen Conference of Presidents Conference of First Vice Presidents Directors of the Banks and Branches HISTORICAL RECORDS: MEMBERS OF THE BOARD OF GOVERNORS, 1913–2003

Statistical Tables
260 264 268 269 270 274 278 279 280 281 282 283 284 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 2003 and 2002 2. Federal Reserve Open Market Transactions, 2003 3. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 2001–03 4. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks, December 31, 2003 5. Income and Expenses of the Federal Reserve Banks, by Bank, 2003 6. Income and Expenses of the Federal Reserve Banks, 1914–2003 7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve Banks and Branches, December 31, 2003 8. Operations in Principal Departments of the Federal Reserve Banks, 2000–2003 9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 2003 10. Reserve Requirements of Depository Institutions, December 31, 2003 11. Initial Margin Requirements under Regulations T, U, and X 12. Principal Assets and Liabilities of Insured Commercial Banks in the United States, by Class of Bank, June 30, 2003 and 2002 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items A. Year-End 1984–2003 and Month-End 2003 B. Year-End 1918–1983 14. Banking Offices and Banks Affiliated with Bank Holding Companies in the United States, December 31, 2002 and 2003

292

Federal Reserve System Audits
295 297 307 320 321 AUDITS OF THE FEDERAL RESERVE SYSTEM BOARD OF GOVERNORS FINANCIAL STATEMENTS FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENTS OFFICE OF INSPECTOR GENERAL ACTIVITIES GENERAL ACCOUNTING OFFICE REVIEWS

323 327

MAPS OF THE FEDERAL RESERVE SYSTEM INDEX