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The Federal Reserve

2008 Annual Report pdf logo PDF version

A Message from the President

The year 2008 began with financial instability. As the year drew to a close, that instability had become turmoil, and the economic recession had deepened and broadened, affecting the region, the nation, and much of the world.

Photo of Dennis P. Lockhart and Patrick K. Barron
Dennis P. Lockhart, president and chief executive officer, and Patrick K. Barron, first vice president and chief operating officer

This year's annual report examines this painful economic transition in 2008 from the Atlanta Fed's southeastern perspective. The financial crisis and recession were tightly interconnected. With continued bouts of financial volatility and the important secondary credit markets frozen, almost all significant economic measures took a turn for the worse. Business investment and consumer spending faltered, and the job market declined proportionately more than it had in decades. Nationally, about 3.1 million Americans lost their jobs in 2008, and the unemployment rate increased from 4.9 percent in January to 7.2 percent in December.

Price pressures also swung widely during 2008. Because global economic growth was solid early in the year, prices increased sharply during the spring and summer. Inflation concerns abated late in the year even to the point of deflation as the economy slackened.

In the Southeast the housing boom in Florida and Georgia that had driven growth for years ended before 2008. Weakness in the housing sector in 2008 spread to commercial real estate and most other sectors of an economy that had grown accustomed to an influx of new people and new construction. But old assumptions collapsed under the pressure of the 2008 downturn. As in the nation, business investment and consumer spending faltered, and the job market took a sharp turn for the worse, with the six states of the Southeast shedding 674,000 net jobs in 2008.

The Federal Reserve acted swiftly and comrehensively to address conditions nationally. The Federal Open Market Committee (FOMC) cut the federal funds rate seven times in 2008, from 4.25 percent in early January to a range just above zero in December.

But even with the fed funds rate as low as it can go, the Fed has other options for implementing monetary policy. Since the outbreak of financial turmoil in mid-2007, the Fed has greatly expanded its role as lender of last resort while undertaking a host of other policy actions geared toward helping markets resume normal functioning. The Fed launched various programs to lend to primary dealers, investment banks, a global insurance company, and industrial and financial companies issuing commercial paper. At the final 2008 meeting, in December, the FOMC announced plans to purchase large quantities of agency debt and mortgage-backed securities to support the mortgage and housing markets.

Of course, the Fed has not acted alone in efforts to stabilize the financial sector and reverse the economic slowdown. The Fed has worked in concert with other central banks around the world. And the U.S. Treasury and the Federal Deposit Insurance Corporation have moved decisively to stabilize and repair financial institutions to encourage them to resume lending—a necessary precursor to recovery in the broader economy.

The Atlanta Fed did its part in helping to formulate effective monetary policy for these turbulent times. The six states that make up the Atlanta Fed's region have a diverse economy, with 46 million people, and the region as a whole is an excellent proxy for the broader national economy. So a firsthand perspective on the region's economy provides an advantage in achieving our mission to inform national monetary policy.

To help enhance this firsthand insight, the bank's Research Department established the Regional Economic Information Network, or REIN, in 2008 to extend our sources of intelligence about the southeastern economy. As part of REIN, our regional executives based at the five Atlanta Fed branches are recruiting new contacts and developing a broader base of information sources.

Along with the REIN network, the Atlanta Fed's head office and branch boards of directors, made up of forty-four business and community leaders, provide invaluable insights into the economic and financial dynamics of the Southeast.

Just as the Research Department expanded its efforts to meet 2008's extraordinary demands, other areas of the Atlanta Fed also worked hard to fulfill our central banking responsibilities amid changing and unprecedented circumstances. Problems in the real estate sector undermined the health of banking institutions the Atlanta Fed supervises and triggered a rise in foreclosures in the Southeast that the bank's community affairs staff actively addressed.

Likewise, the Fed System's Retail Payments Office, based at the Atlanta Fed, responded to cost pressures and a changing payments mix with continued improvements in efficiency, even as economic conditions in the country worsened.

I believe one of the lessons of 2008 is that a functioning financial sector is absolutely vital to economic growth. Banks play a pivotal role in the allocation of credit that is so important to private sector economic activity—from buying homes to investing in new equipment to meeting payroll. But during 2008 we saw the collapse or near collapse of major financial institutions. These failures severely undermined the most important factor in our economy—trust. The collapse of trust or confidence further restricted the flow of credit, which in turn added to risk aversion and magnified weaknesses in the broader economy.

With so much attention devoted to our nation's financial health, tensions have grown between those who identify with the mainstream public—Main Street—and the institutions that make up the financial sector, or Wall Street. This perception is understandable. But I believe it's a mistake for Americans to see their interests as disconnected from banks and financial markets.

The turbulence that spread from the financial sector to the broader economy was years in the making, and it won't disappear overnight. But I believe the comprehensive policy actions that began in 2008 and continued into 2009 will help to position the U.S. financial sector and economy for stability and recovery in the long term.

Signature of Dennis P. Lockhart

Dennis P. Lockhart