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

Federal Reserve Bank of Kansas Citywww.kansascityfed.org/oklahomacity

Greater Oklahoma City PartnershipFebruary 2, 2015

• The “Fed” consists of three main entities:• Board of Governors: 7 members appointed by U.S. President• Federal Reserve Banks: 12 total; semi-independent by design• Federal Open Market Committee: 19 members; 12 voting

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

• Lender of last resort – provide liquidity in times of crisis• Monetary policy – promote full employment and low inflation • Bank regulation – ensure safety and soundness of banks• Financial services – bank for banks, bank for federal govt.

Overview of the Federal Reserve System

Federal Reserve Districts and Office Locations

• Functions – 40 staff• Research on U.S. and Oklahoma economies• Economic and financial education outreach• Examinations of Oklahoma financial institutions

• 2015 board of directors• Pete Delaney (chair), Chairman & CEO, OGE Energy Corp., Oklahoma City• Clint Abernathy, Owner, Abernathy Farms, Inc., Altus• Michael Coffman, CEO, Panhandle Oil & Gas, Inc., Oklahoma City• Chuck Hall, Chairman & CEO, Exchange Bank & Trust, Perry• Jane Haskin, President & CEO, First Bethany Bank & Trust, Bethany• Tina Patel, Co-Owner & CFO, Promise Hotels, Tulsa• Doug Stussi, EVP & CFO, Love’s Travel Stops, Oklahoma City

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

The U.S. Economyand Monetary Policy

4.6

2.5

8.89.7

11.1

1.7

5.0

3.2 3.2

8.9

4.5 4.4

2.6

4.3 4.1

1.92.8

-2.2

-4

-2

0

2

4

6

8

10

12

Total GDP Consumerspending

Residentialinvestment

Businessinvestment

Exports Governmentspending

Q2 2014Q3 2014Q4 2014

Growth in Components of Real GDP

Percent change from the previous period, SAAR

Source: U.S. Bureau of Economic Analysis, Macroeconomic Advisors

GDP growth was very strong in mid-2014, and solid growth was sustained in Q4

GDP forecasts for 2015-17 remain solid, as the economy recovers further

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

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 LongTerm

Dec. FOMC Forecast Ranges in Yellow

Unemployment Rate Seasonally Adjusted

Percent

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

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 LongTerm

Dec. FOMC Forecast Ranges in Yellow

Unemployment continues to fall and could reach long-term levels by 2015

PCE Inflation IndexPercent change, year-over-year

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

0

1

2

3

4

5

6

0

1

2

3

4

5

6

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 LongTerm

Dec. FOMC Forecast Ranges in Yellow

Inflation remains low and is expected to stay relatively subdued through 2017

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 LongTerm

(2)

(15)

Federal Funds RateYear-end target

Percent

Sources: Federal Reserve Board, FOMC

Dec. FOMC Forecast Ranges in Yellow

Most FOMC participants project the first federal funds rate increase in 2015

Note – Number of participants who project the initial increase will occur in the specified year in parenthesis

Trends in the Oklahoma Economy

92

94

96

98

100

102

104

106

108

110

92

94

96

98

100

102

104

106

108

110

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Tulsa Metro

OKC Metro

Index: Jan-08=100

Source: U.S. Bureau of Labor Statistics

Level of Payroll Employment Through December 2014

Employment continues to rise in the state, especially in the Oklahoma City metro area

Oklahoma

U.S.

Non-Metro OK

Percent change year-over-year

Job Growth by Industry December 2014

Most industries grew in December, especially construction, manufacturing, and health

Source: Bureau of Labor Statistics

-4

-2

0

2

4

6

8

10

12

Total Constr. Mfg. Edc. &Health

Finance Hospitality Prof. &Bus.

Services

Energy Fed. Govt Trade &Transp.

State &LocalGovt.

OKOKCTulsaRest of OK

Source: OK Employment Security Commission

Unemployment is well below the national average in most of the state

Oklahoma County Unemployment Rates November 2014

U.S. = 5.6OK = 4.2

Percent

Source: FDIC

Share of Unprofitable BanksCommercial Banks

Banking conditions remain healthy in Oklahoma and are improving nationwide

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014

U.S.

OK

Source: EIA, Reuters, FRBKC Energy Survey

WTI Oil Prices

Oil prices are down more than 50 percent, and only expected to rise marginally in 2015

$/Barrel $/Barrel

Note: Q4 Energy Survey conducted Dec .16 - 31

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

Actual

Q4 Energy Survey respondents expectedprice by year-end 2015 to average $70

(red)

Q3 average breakeven $79 (black)

EIA January Forecast

Jan. 27 Futures

Dec-15

Diffusion Index

Energy Drilling Activity and Credit AccessYear-over-year

The Q4 KC Fed energy survey showed sharp declines in drilling plans and credit access

Source: FRBKC Energy Survey (conducted Dec. 15-31, 2014)

-80

-60

-40

-20

0

20

40

60

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015

Drilling/Business Activity

Access to Credit

Expectations

Many regional energy firms noted much lower capital spending plans for 2015

Q4 Energy Survey Expected Change to 2015 Capital Spending

0

10

20

30

40

50

Up morethan 20%

Up 10-20%

Up lessthan 10%

Down lessthan 10%

Down 10-20%

Downmore than

20%

Percent

Q4 Energy Survey Expected Change to 2015 Employment

0

10

20

30

40

50

Up significantly Up slightly Down slightly Downsignificantly

Percent

Source: FRBKC Energy Survey (conducted Dec. 15-31, 2014)

Rigs started falling in late 2014, and the decline has accelerated in January

0

50

100

150

200

250

0

500

1000

1500

2000

2500

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

U.S. (L)

OK (R)

Source: Baker Hughes

Number of rigs Number of rigs

Weekly U.S. and OK Total Rig Countsthru Jan 30, 2015

Source: S. Brown (2014) and S. Brown and M. Yucel (2013)

Estimated Employment Effect from Lower Oil Prices

Economic models suggest a negative impact in Oklahoma and several surrounding states

Past instances of large oil price declines have hurt Oklahoma when the sector is large

9%8%

5%3% 3%

5%6%

13%

9%

5% 5%

7%

15%13%

-15%

-20%

-11%

-8% -7%

-9%

-2%-4%

1%2%

-1%-2%

-16%

-10%

-7%

2%

-3%

-7%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1982-83 1985-86 1990-91 1997-98 2000-01 2008-09 2014-15

Mining share of OK jobsMining share of OK worker earnings1-year OK mining jobs change1-year total OK jobs change1-year OK real sales tax receipts change

?

Sources: Bureau of Economic Analysis; Census Bureau

Oklahoma Employment and Real Sales Tax Receipts Change in years following a >30% real oil price decline, 1980-present

• U.S. economic growth has been strong, and the outlook appears favorable

• Oklahoma’s economy has also been strong, especially in Oklahoma City

• But lower oil prices are a concern given the state’s high concentration in energy

Summary