Chad Wilkerson Vice President, Economist, and Oklahoma City Branch Executive

Federal Reserve Bank of Kansas City

www.kansascityfed.org

• The Federal Reserve System was created in 1913 (sponsored by OK Sen. R.L. Owen) and consists of:

• Board of Governors: 7 members appointed by U.S. President

• Federal Reserve Banks: 12 total; semi-independent by design

• Federal Open Market Committee (FOMC): 19 members; 12 voting

• As with most central banks around the world, the Fed’s responsibilities fall within four general areas:

• Monetary policy – control money supply to affect growth and inflation

• Lender of last resort – provide liquidity in times of financial crisis

• Bank regulation – ensure safety and soundness of banks

• Financial services – bank for banks, bank for federal government

History and Structure of the Federal Reserve System

Federal Reserve Districts and Office Locations

• History, staff, and functions

• Branch office opened in 1920; currently have about 35 staff

• Functions include economic research, bank examinations, public outreach

• 2010 branch board of directors

• Steve Agee (chairman), President, Agee Energy, and Professor, OCU, OKC

• Bill Anoatubby, Governor, Chickasaw Nation, Ada

• Jim Dunn, Chairman, Mill Creek Lumber and Supply Co., Tulsa

• Jacque Fiegel, Senior EVP and COO, Coppermark Bank, OKC

• Rose Washington Rentie, Executive Director, TEDC Creative Capital, Tulsa

• Doug Tippens, President and CEO, Bank of Commerce, Yukon

• K. Vasudevan, Chairman, Service and Technology Corp., Bartlesville

The Oklahoma City Branch of the Federal Reserve Bank of Kansas City

The pace of U.S. recovery remains moderate and is expected to stay on track, with inflation remaining low

Oklahoma’s recession and recovery path has been fairly typical for the state, but risks to growth remain

The Economic Outlook

25

30

35

40

45

50

55

60

65

-1000

-800

-600

-400

-200

0

200

400

600

Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14

Private Employment (left axis)

ISM Manufacturing Index (right axis)

ISM Non-Manufacturing Index (right axis)

Change from previous month, thousands

Source: Institute for Supply Management, Bureau of Labor Statistics

U.S. Private Payroll Employment and Business Indexes

U.S. output continues to grow solidly, but job growth is modest

Index

0%

20%

40%

60%

80%

100%

120%

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Federal government debt

Household debt

No spending cuts or tax increases

U.S. Debt as a Share of GDP

Percent

Sources: Federal Reserve, BEA, CBO

Consumer debt could constrain growth and federal debt is a longer-term concern

Plus extension of current tax rates

0

2

4

6

8

10

12

0

2

4

6

8

10

12

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Portugal Ireland

Spain Greece

Italy

Percentage points

Europe’s sovereign debt problem has also flared up again

Spreads to German Bunds (10-yr)

Source: Federal Reserve Board

Greece (US$305b) 2.6%

Ireland (US$209b) 1.8%

Portugal (US$220b) 1.9%

Spain (US$1381b) 11.8%

Italy (US$1992b) 17.0%

Germany 26.8%

France 21.3%

Others 16.9%

Rescue packages: Greece: 110 billion=US$144 billion Ireland: 67.5 billion=US$88 billion

But European nations most threatened are only a small part of Euro Zone GDP

Shares of Euro Zone GDP

Source: U.S. Bureau of Economic Analysis

Fed policymakers expect continued moderate U.S. GDP recovery

Real Gross Domestic Product

Percent change, year-over-year

Source: U.S. Bureau of Economic Analysis, FOMC

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Nov. FOMC Forecast Ranges in Yellow

Long Term

Unemployment Rate Seasonally Adjusted

Percent

Source: U.S. Bureau of Labor Statistics, FOMC

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Nov. FOMC Forecast Ranges in Yellow

But with U.S. unemployment remaining high for some time

Long Term

PCE Inflation Index

Percent change, year-over-year

Source: U.S. Bureau of Economic Analysis, FOMC

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Nov. FOMC Forecast Ranges in Yellow

Inflation is expected to remain tame in the near term, but will require careful oversight

Long Term

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Projection

Trillion dollars

Assets

Liabilities

Currency

Reserves

SFA

Other

Treasury Securities

MBS & Agency Debt Short Term Lending to Financial Firms

Rescue Operations

Targeted Lending Programs

The FOMC’s plans will swell the Fed’s balance sheet further

Federal Reserve Balance Sheet

Source: Federal Reserve Board

Source: U.S. Bureau of Labor Statistics

Average Recession and Recovery Path, 1956-2006 Employment level 4 quarters before and 8 quarters after U.S. jobs peak (R)

Oklahoma typically enters recessions late but exits around the same time as the nation

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

R-4 R-3 R-2 R-1 R R+1 R+2 R+3 R+4 R+5 R+6 R+7 R+8

US

OK

Source: U.S. Bureau of Labor Statistics

Current Recession and Recovery Path Employment level 4 quarters before and 10 quarters after U.S. jobs peak

The current episode, while worse, has largely followed the historical pattern

0.92

0.94

0.96

0.98

1.00

1.02

1.04

Q1:07 Q3:07 Q1:08 Q3:08 Q1:09 Q3:09 Q1:10 Q3:10

US

OK

Percent change year-over-year

Source: Bureau of Labor Statistics

Employment Growth October 2010

Recent solid state job growth has been driven by energy, construction, and services

-4

-2

0

2

4

6

8

10

12

14

16

18

Total Energy Const Educ & Health

Prof & Bus Svcs

Leis & Hosp

Finance Mfg Trade, Transp.

& Utilities

State & Local Govt

Info

U.S.

OK

Index

Source: KCFRB Ag Credit Survey

Oklahoma Agricultural Conditions

Agricultural conditions in the state have also improved after bottoming in 2009

30

40

50

60

70

80

90

100

110

120

130

140

150

30

40

50

60

70

80

90

100

110

120

130

140

150

2004 2005 2006 2007 2008 2009 2010

Capital Spending

Index

Q4 Expectations

Farm Income

Source: Oklahoma Employment Commission

Unemployment Rate by State October 2010

With Oklahoma’s shorter recession, unemployment remains relatively low

6.9

Percent

Source: FDIC

Noncurrent Loans as a Share of Total Loans Commercial Banks

And Oklahoma banks remain in much better shape than in the nation as a whole

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q3 2000 Q3 2001 Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010

U.S.

OK

Percent

Source: MBA

Foreclosure and Past Due Mortgage Rates

Housing continues to be a risk, but much less so than in the nation

0

2

4

6

8

10

12

Q3:07 Q4:07 Q1:08 Q2:08 Q3:08 Q4:08 Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10

OK Foreclosure

U.S. Foreclosure

OK Past Due

U.S. Past Due

$/MMBTU $ per Barrel

Source: Bloomberg

Energy Prices

0

30

60

90

120

150

0

3

6

9

12

15

Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Natural gas (left scale, per MMBTU)

Crude oil (right scale)

Natural gas prices remain the state’s biggest risk, but high oil prices have helped

The U.S. economy is recovering and expected to continue to grow moderately, with low inflation

Oklahoma’s economy is also recovering and remains in much better shape than the nation

Summary