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Annual Report, 2001
2001 Annual Report
Message from the President

In the post-9/11 world in which we all live, “Ground Zero has assumed a special significance. Like millions of other people, I saw from a distance many tragic and unforgettable images of Ground Zero. But it wasnt until last November that I viewed the area in person. It was an unforgettably sad and moving experience. I left Ground Zero with a more complete realization of the human loss, physical devastation and bravery of those caught in the attack and involved in the rescue efforts.

While Ground Zero is the site of an american tragedy, I believe it has also become a symbol of something hopefulthe tenacity, enterprise and resolve of the American people. Along with hundreds of millions of people across the world, I am confident the U.S. will continue to rebound stronger than ever.

The terrorists’ intentions may never be fully understood, but one of their goals—to disrupt our economy—was clear. The World Trade Center was an important symbol of our free-enterprise system, located in our nation’s financial center. In the aftermath of the attack, the risk of a cascading crisis in our financial system was very real. And yet, only a few short hours after the attacks, the financial system had begun to recover and resume operations.

This quick recovery was due to the extraordinary efforts of many people from a wide range of public- and private-sector organizations. I’m proud of the Federal Reserve’s role in this effort, which was very much in keeping with our origins and the classic mission of a central bank. Congress created the Federal Reserve in 1914 in response to a series of financial crises. Since its very beginning, the Fed’s mission has included maintaining financial stability and containing systemic risk.

The Federal Reserve System’s response to 9/11 involved all of its diverse responsibilities—implementing monetary policy, providing financial services and supervising and regulating banks. As detailed in the following article, the Chicago Fed faced challenges in each of these areas. And like the rest of the Fed System, the Chicago Fed rose to these challenges. I’d like to thank Chicago Fed staff at all of our six offices for their outstanding efforts. And I’d like to make a special note of the extraordinary efforts of the New York Fed, which continued to operate despite its location just a few short blocks from Ground Zero.

As Chairman Greenspan has pointed out, the crisis highlighted the advantages of our nation’s diversified and decentralized economic and financial structure. On a day-to-day basis, our nation’s financial system operates within a physical infrastructure. Without robust private-sector participation and effective supervisory oversight, local disasters affecting the infrastructure can spill over into the broader economy and increase systemic risk. At first glance, our financial system may seem duplicative or inefficient, encompassing banks, security firms, insurance companies and many other participants. But the competition encouraged by these many participants increases innovation and flexibility—qualities that were essential on 9/11.

Similarly, the Fed’s regional structure, with its decentralized design and mixture of public and private features, may seem overly complex.Yet our structure fosters strong links to our customers and stakeholders; extends the geographical span of our operations, knowledge and resources; and encourages innovation.These advantages served the Fed well in meeting the challenge of 9/11.

While our financial system recovered very quickly, the effect on the economy has been longer-lasting. The attack shook an already weak economy. The Federal Open Market Committee (FOMC) responded decisively, cutting the target for the federal funds rate by 13/4 percentage points during the final four months of 2001. These actions built on earlier policy moves during 2001 in which the target fed funds rate was reduced by 3 percentage points. Overall, the FOMC reduced the target fed funds rate during 2001 from 61/2 percent to 13/4 percent—the lowest level in more than 40 years.

Though the economy was weakened by the attack, our longer-term prospects continue to be favorable. The U.S. economy is increasingly resilient to shocks. Deregulated financial markets, more flexible labor markets and major advances in information technology all provide a foundation for solid economic growth. Another important factor has been increased globalization. It is perhaps a natural reaction to seek a reduced level of economic interaction among nations following 9/11. But we must not lose sight of the many economic benefits of globalization—for the U.S. as well as all other nations. Open markets and expanded trade are some of the best ways to increase economic growth, particularly in developing countries.

Our nation has endured a tremendous tragedy. However, the resiliency and strength of our free-enterprise system, which served us so well after 9/11, will help us continue to prosper in the future.

The Chicago Fed had a successful year in 2001, as reflected in the recap of our accomplishments on pages 23-27. I’d like to extend my appreciation to our staff for their hard work and dedication and to our directors for their leadership and counsel. In particular, I’d like to thank three individuals who completed their service as directors: Richard Bell and Stephen Polk on our Detroit board, and Arthur Martinez on our Chicago board. A special note of gratitude to Arthur, who provided especially noteworthy service as chairman for two years and deputy chairman for three years, and will continue on as a director into part of 2002.

As we look forward, the events of 2001 have only strengthened our resolve at the Chicago Fed to accomplish our mission: to further the public interest by fostering a sound economy and stable financial system.


Michael H. Moskow

President and Chief Executive Officer

March 26, 2002

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