Steve:
It's a pleasure for me to be here and introduce Chad. I've known Chad,

now, for almost four years. I was -- he came to Oklahoma City in January of 2006 to become the branch executive of this branch of the

federal reserve bank of Kansas City, which I'll talk just briefly about, here, in a minute. But, then, he called me in March or April of that same

year to ask me if I would consent to become a board member of this branch and we discussed it for a little bit and I consented to do that, so

now I've been on this board almost four years and I've, because of just the way people rotate and term out of office -- I've become the chairman

of this branch board. There are seven members of this board in Oklahoma City. A little bit of background about the Fed and about Chad.

Chad is an economist. He went to school at Liberty -- at William Jewell College in Liberty, Missouri, as an undergraduate, and then he got a

master's degree in economics from the University of Chicago, and left the University of Chicago and went to the Kansas City Fed, where he

worked for eight years as a research economist. And then he was picked by the president of the Kansas City Fed, Tom Honig, to come

down here and be the branch executive. He's served in that capacity ever since. This branch is primarily responsible for looking at events

going on -- economic events going on in Oklahoma. Our board is responsible for reporting to Chad and we have board meetings about

every six or eight weeks where we talk about things going on in Oklahoma. We have branch directors from all over the state, from

different areas of interest, whether they're construction, energy, agriculture, so we're pretty diversified in our backgrounds. But what we

try to do is provide anecdotal information, current anecdotal information about what's going on in the economy. Chad takes that information and

reports that to the Kansas City Fed and then, of course, Tom Honig, our bank president of Kansas City, goes to Washington, and he is now,

this year, a voting member on the Federal Open Market Committee, which makes interest rate decisions with respect to our country. Chad

also is a member of the United Way of Central Oklahoma. He's a member of the Downtown Club of Oklahoma City and also the

Economic Club of Oklahoma. He's from -- originally from the St. Louis area. He has written several articles for the Kansas City Federal

Reserve publications on our regional economy. He looks at our regional economy and out state economy. He's done things about

defining industries in Oklahoma. He just finished a paper last year on the recession and recovery across the nation, how does Oklahoma

enter and leave or exit a recession compared to the rest of the country, so he's got a lot of research interests, and this talk -- I'm anxious to

hear what he has to say today, because he's always staying up current with economic activity. So, it's my pleasure to introduce Chad

Wilkerson.

Chad Wilkerson:
Well, thanks very much, Steve. It is a pleasure to be here today, and I

might just try to stay at the -- the podium will work, I think, O.K. Steve gave a nice introduction about the Federal Reserve, and I'll talk just

briefly about that, but skim through a good part of that, given his good coverage of that. It's better to hear it from him than from an insider

anyway. So -- but what I mainly want to talk about today is the economy, obviously. First, to get a general sense, the outlook for the U.S.

economy, and how that's been developing, what might lie ahead for 2010, and then focus in on the Oklahoma economy and how it

compares. As Steve mentioned, we'll talk just a bit about how Oklahoma usually does in recessions and how this particular episode

is similar or different, and then what might lie ahead for us for 2010. So, to begin, I might let you fire up the presentation. Great. So I did want

to say just a couple of words about the Fed. Steve has covered most of this, but I wanted to talk first just real generally about what the Federal

Reserve does. I always do this with my speeches as a bit of an advertisement, but I think it's become increasingly necessary for the

last year or two to talk a bit more about what the Fed does. We've been in the news just a bit the last couple of years, probably just a bit more

than we like to be in the news. So, in general, what the Fed does is try to promote three things that are mandated to us by Congress. The first

is low and stable inflation, which is the mission of most central banks around the world -- all central banks around the world. Also the Fed

has a mission to promote maximum sustainable employment. Not all central banks have that mission. Some are charged just with inflation.

Some are charged with both growth and inflation and that makes it a bit more challenging sometimes. And, then, as all central banks do, and

in conjunction with other entities, we're charged with maintaining national financial stability, which of course has been a challenge for

the last couple of years, as well. We do that through our three primary functional areas. The first is what's usually the most widely known

function area. Monetary policy, as Steve described, consists of setting very short-term interest rates to affect both growth and inflation. That's

usually what it consists of. The Fed has been doing some other things recently that I'll talk a bit more about in a minute. We're also

responsible for bank regulation in conjunction with some other entities. We specifically regulate all bank holding companies across the country

and then a subset of actual banks, specifically state-chartered banks that are members of the Federal Reserve system. And then finally,

we're responsible for monitoring the nation's payment system, obviously for distributing currency and cash to banks across the

country, but also for monitoring the electronic payment system, and we serve as the bank for the federal government. And then, the system

consists of three main bodies. First is the Board of Governors in Washington, which is a government agency. It has seven members,

chaired by Ben Bernanke, at the moment, obviously, who are appointed by the Senate to 14-year terms. Then there's the 12 Federal Reserve

banks around the country, each serving a unique district. And then, there's the Federal Open Market Committee, which is a combination of

those two groups. It consists of 19 total members, the seven governors of the Board of Governors, and then the president of each Federal

Reserve bank. Twelve of those folks have a vote at any one time. The seven governors always have a vote. They're the political appointees,

and then five of the 12 Reserve bank presidents have a vote on a rotating basis, and as Steve mentioned, our president in Kansas City,

Tom Honig, is a voting member in 2010. Here, then, are the 12 Federal Reserve districts and all of our offices across the country. We're in the

Tenth Federal Reserve District, headquartered in Kansas City. We have a branch office here and in Omaha and in Denver. And a bit more

specifically about the Oklahoma City branch, Steve covered a bit of this, but we've got about 35 folks full-time involved in economic research

with me. Most of the folks of the branch are actually bank examiners, and then a public and community affairs function, as well. And our

current board of directors is listed at the bottom. You can see they're drawn from various parts of the state and from different industries, and

Steve kind of described very well how they interact with the Fed. So with that bit of advertisement past, I want to talk now about the U.S.

economy. I want to make three main points here today. The first is that the U.S. economy is growing again with help from monetary and fiscal

stimulus, but the strength of recovery in 2010 and perhaps beyond is likely to be modest for a number of factors that we'll talk about. And with

that modest growth expected, inflation is expected to remain fairly tame in the near term. So I want to go through some of the data about the

U.S. economy kind of behind this story, and the broadest measure of economic activity we have nationally is gross domestic product, or

GDP. That's what's shown in this slide. Over on the left is total GDP growth of each of the first three quarters of 2009. That's the most

up-to-date data we have. You can see that in the third quarter the economy began rising again, with GDP up 2.2% from the previous

quarter. That followed what was the deepest recession the U.S. has had in a very long time, with steep declines continuing on to the early

part of 2009. Over on the right shows the main components of GDP and you can get a sense for both what held us down earlier in the year

in 2009 and then what has begun to increase, and I think you'll notice on the what has begun to increase side that in each of the cases,

except for exports, part of the reason for the increase is due to various types of stimulus packages. For example, consumer spending rose in

the third quarter of 2009, but that was also the quarter of the Cash for Clunkers program and that provided a good amount of that boost.

Residential investment, which has been the hardest hit sector of all during the past couple of years, the housing sector, also began to rise

in the third quarter, but that was also probably the peak quarter of the first-time home buyer credit program and that provided some of that

boost. Also rising were exports, and I think that is a real source of growth that's begun to lift the economy out of recession. The rest of the

world economy has strengthened over the past couple of quarters. The dollar has weakened a bit and exports have begun to rise, and I think

most economists expect that to be a continuing trend for the next couple of years. We need to shift as a nation from having as big of a

share of our GDP and consumer spending into producing more and exporting more to other countries than we've had in the past. And then,

finally, on the right, of course, government spending grew in both the second and third quarters of last year. The stimulus package was

passed in February. That takes us just through the third quarter of last year. We're now, of course, well into the first quarter of this year, and

while we don't have GDP numbers for the fourth quarter, we do have several other indicators of activity that suggest expansion continued

on through the fourth quarter, though, again, wasn't especially perhaps overly robust. What's shown here are three national indicators of

activity. The bars show national payroll employment and the two lines show two national surveys of business activity, one for manufacturing,

one for non-manufacturing, and you can see the continued improvement on into the fourth quarter of this year for most of these

indexes. Employment did fall again in December, but the rate of decline has fallen considerably and output in both manufacturing and

to some degree in the services industry has begun to rise. So, the expansion has continued on into the fourth quarter of last year, but, for

example, if you'll look back to the previous expansion, so far we're not back up to what might be felt by most people as regular expansionary

times. One of the reasons that the economy has begun to lift out of its recession is that some of the stresses that we had in the financial

sector, especially in the fall of 2008, but continued on into the early parts of 2009, have improved considerably. One measure of that is the

credit spread that's shown on this chart here. It's the LIBOR-OIS spread, which is basically the rate at which banks are willing to lend to

one another on a one-month and a three-month basis. If you'll look back before July of 2007, that rate was basically not -- and that's the

spread of that rate over the federal funds rate, what they can borrow in the federal funds mart. And if you look before July of '07, back before

the words "sub-prime mortgage" were familiar to most of us, that rate was very, very low. There was -- meaning there was almost complete

confidence of banks to lend to one another. In the fall of 2007, when the sub-prime mortgage crisis first raised its head that degree of trust

diminished just a bit, and, then, you can see -- and in the fall of 2008 it escalated to unprecedented levels. Since then the government and the

Federal Reserve have taken a number of actions, obviously to help alleviate those strains in particular, and you can see the improvements

that have been made and, indeed, by late 2009 and on into early 2010, conditions were pretty much back to normal in terms of banks lending

to one another. Some other credit markets still have a way to go to improve and in particular -- I think this is going to be the next slide --

banks' lending standards have tightened considerably, and so there is still a bit of stress in credit markets. Out credit isn't as easily obtainable

as it was several years ago. In many ways that's a good thing, but credit is still fairly tight, and I know some businesses and builders that

we talked to are complaining, frankly, about the availability of credit. They're wanting to expand, and one of the things keeping them from

doing so is availability of credit. But, again, banks have had a difficult last couple of years and have to be cautious with their lending. So

that's where we are up to date. What is expected heading forward? Well, what's shown here is the forecast of the FOMC, the Federal Open

Market Committee that we described earlier, for 2010, '11 and '12. This shows gross domestic product annual growth for the last 30 years, so,

for example, you can see the deep recession of 1982. We also had mild recessions in 1980 and in 1991. There also was a mild recession

in 2001, but it didn't last for a whole year, so GDP actually grew that year. You can see the most recent recession, and in this particular

chart it doesn't look -- 2009 doesn't look as bad as the 1982 recession, but that's because the deepest parts of the recession happened in two

calendar years. The worst quarters were the fourth quarter or '08, first quarter of '09. So a fairly weak period, there, as well. You can see

forecasts are for fairly solid growth in 2010, '11 and '12, but a good amount of uncertainty about just how strong that recovery might be.

What's shown in the yellow portion of the bars is the range of views across the members of the FOMC. There's 19 total. There's seven

governors and 12 reserve bank presidents. So, for example, for 2010, at least one member expects GDP growth to only be 2%, and at least

one expects it to be closer to 4%. That's a fairly big range, but if you'll look back even compared to coming out of the last deep recession,

1982, even the most optimistic members of the FOMC are not anticipating growth like we saw in the year or two after the 1982

recession. And I think a big reason for that is that credit does remain strained. Consumers remain still highly leveraged and the country

needs to go through a bit of a process in coming years, as I mentioned, of becoming less reliant on consumer spending, more

reliant on production, fixing their balance sheets. It will be good for all of us in the long run, but in the short run it has the implication of

producing perhaps not as quite as strong of growth coming out of a recession as is usually the case. And just in general, growth coming

out of financial crisis related recessions tends to be not as strong as coming out of other types of recessions. So growth is expected to be

somewhat -- "modest" is probably a bit too tame, but only moderate growth the next couple of years. It doesn't look too bad compared to

most of the expansionary years of the past 30 years or so, but we have a lot of lost output in 2008 and 2009, and so the degree to which this

recovery is expected to be modest I think best shows up in the next chart, which is forecast for the U.S. unemployment rate for the next

three years. You can see the rate's expected to peak out in 2009 and '10 somewhere close to where it is now. It's currently at 10%. It got up

to 10.2% in October, I believe. It may bump a bit again in early 2009 because a bit of why it has declined the last two months isn't

necessarily that employment has increased, but that some unemployed workers have stopped looking for work, and therefore,

they fall out of the labor force and fall out of the official statistics. But you can see that with the moderate recovery expected, unemployment is

expected to come down the next couple of years. But interestingly, even the most optimistic member of the FOMC in 2012, which would be right

here, expects unemployment to still be about 6%, which would be at the upper end, as you'll see on the right, of what the long-term full

employment range would be. So, recovery is beginning. It's going to be a fairly decent speed of recovery compared to normal economic times,

but given the big loss in output that we've had, it may not feel like a very strong recovery because unemployment's expected to remain

somewhat elevated for a couple of years. And, so, with that general expectations of a moderate, but not robust recovery, although there are

varying views and, in fact, my boss in Kansas City has -- I think is more on the upper end of expectations for strength in the economy, related in

part to the huge amount of stimulus that's out there in both monetary terms and fiscal terms -- but even his forecasts for the economy, as we

saw, are somewhat moderate for coming out of deep recessions. And with that moderate growth expected, and with there still being a

considerable amount of excess capacity at the nation's factories and other businesses of unemployment remaining high, inflation is

expected to remain low, at least in the near term. That's what's shown here. In the long run, the FOMC would -- I think it's fair to say this --

would like for inflation to stay somewhere in the 2% or less range. That's a range that allows businesses and consumers to plan for the

future, have a good idea of what their spending will be and is best for the long-term growth of the economy. And for the most part that's what

the expectations are for the next couple of years in terms of inflation. But there have been some increasing concerns over the past year or

so because of what's shown in this next slide, and that's the mass of expansion of the Federal Reserve's balance sheet, which has

happened coincidentally with the number of lending facilities and assistance for the financial sector's improvement that has happened

over the past year. You can see that since the financial crisis of the fall of 2008, the Fed's balance sheet has risen from about $800 billion to

more than twice that amount, to over two trillion dollars. This shows the assets side of our balance sheet. On the other side of the balance

sheet the liability side would primarily be currency in circulation. That's our primary liability, in addition to reserves sitting on banks' balance

sheets. But what's shown here is the asset side and you can see that before the recession began in December of 2007, our balance sheet

consisted primarily of treasury portfolio, treasury securities and then a small portion for other assets, such as our buildings and other assets.

Then starting when the recession began in late 2007, another color shows up on this chart, the gray portion, which is short-term lending to

financial firms, and that's kind of the typical role of a central bank in an economic crisis and a recession, is to lend, as the lender of last resort,

to financial institutions that have day to day liquidity needs and can't borrow from anywhere else. So that portion continued to grow through

the early part of the recession as is typical for a recession. But then with the unprecedented financial crisis we had last fall, that portion

rose considerably for similar reasons, for providing liquidity to firms that were strapped for liquidity, the typical role of a central bank in a

financial crisis. But also around that time some other colors to this sheet began to show up. One is the orange portion of the bar, which

represents a couple of rescue operations that the Federal Reserve had to become involved in. The first was Bear Stearns in the spring of 2008,

and then with AIG in the latter part of 2008. Now different folks have different opinions about the degree to which the Federal Reserve

should have been involved with this. I think we wish we were less involved than we had been. But at the time of those crises, the only

institution in the United States with the ability to keep the economy from falling off of a cliff was the Federal Reserve. And so we have those

assets on our balance sheets for now, for better or worse. The red portion of the bar or of the chart shows operations focused on broader

credit conditions. In particular our purchases of mortgage-backed securities that have grown considerably over time. That program is set

to expire at the end of the first quarter of this year, but in the meanwhile we've added considerably to our balance sheet to keep long-term

interest rates low, to keep mortgage rates low and to help foster the recovery. More recently, you'll see that the size of the balance sheet

has stayed about the same as where it was at the time of the financial crisis, but the composition has changed. For example, the treasury

portion of our portfolio is now about the same as it would normally be at this time. The gray portion of the bar, kind of the usual short-term

lending through financial firms, has diminished over time as credit conditions have improved, as we showed in that earlier slide. And

that's kind of the typical path in coming out of a recession. So the extra part that we're left with is in particular the red portion which consists

primarily of long-term mortgage backed securities, and that's something that the Fed is going to have to wind down in coming years

as that market improves, and that'll be one of our challenges heading forward. Now, again, the other side of our balance sheet would be

currency in circulation and reserves on banks' balance sheets, and given the size of the expansion of our balance sheet on the other side,

and the size of the expansion on that side, that brings about some concerns about inflation, given the amount of money that is at least in

the banking system. The one tool that the Fed has acquired over the past year that most central banks around the world have now is the

ability to pay interest on excess reserves on banks' balance sheets. So while banks have a considerable amount of reserves on their balance

sheets, by us being able to pay out higher interest rate on those reserves, they should be able to keep those on their balance sheet, not

get them into the economy until we're able to unwind the various facilities that we've set up. That's the plan. We've got, I think, the

technical expertise to do it, but it is some new things that we're doing, and that'll be one of our challenges in the years ahead. So with that

long description of a balance sheet, something I never expected to have to do a couple of years ago, let's turn now to what's a more

interesting story always for me, I think probably for most folks in this room, and what I think has just begun to finally be a better story than it's

been for the past year or so. So, I want to talk about the Oklahoma economy. As usual in recessions, Oklahoma entered this recession

later than the nation and after steep declines pretty much throughout 2009 the state is showing some early signs of recovery. Some risks

remain including, I think, especially the future path of energy prices. So let's take each of these in turn. First, how does Oklahoma usually do

during U.S. recessions? This is the research that we did this past year that Steve referenced in his introduction. What's shown here is the

average recession path in the post-World War II period for the U.S. and Oklahoma. At point "R" is where the U.S. recession begins, and this

shows employment levels four quarters before and eight quarters after a recession. So in the U.S. employment is rising up until the recession

begins, then on average it falls for four quarters and then picks up and is back to its previous level within eight quarters on average. In

Oklahoma by contrast, when the U.S. economy begins to fall once the recession starts, we continue to add jobs on average for two quarters

after the nation, then employment falls for on average two quarters, and then we begin to increase. And interestingly for me, my prior was that if

we enter recessions late, then we exit recessions late, on average. But on average that's actually not the case. On average we exit recessions

at about the same time as the nation and on about the same path. So if you look at this chart from beginning to end, the net effect here at the

end is that in recessions usually Oklahoma gains 2% of jobs relative to the nation. Why is it that we tend to enter late and tend to exit at about

the same time? Well, I think the reason for tending to enter late is fairly straightforward. I think folks mostly know that. It's related to the energy

sector and energy prices. Energy prices tend to be high at the beginning of a U.S. recession. Some might even say they cause U.S.

recessions. We, of course, tend to benefit from that for a while, while the rest of the economy suffers. On average for about two quarters until

demand falls enough that energy prices fall and then we enter into the recession. That, of course, is almost exactly what happened this time.

But coming out, I think the story for why we on average come out at about the same time as the nation is the massive policy response that

there is to recessions, which tend to not be targeted to any specific part of the country. For example, there's always a monetary policy response.

The Fed always lowers interest rates and that goes everywhere and about the same amount. Everyone gets lower interest rates. If it's a

deep enough recession, there's also a fiscal policy response, a fiscal stimulus. That, of course, happened this time, and those, again, don't

tend to be very regionally focused. Everyone on a per capita basis gets about the same amount. So regardless of where you are in the

recession, the boost begins to hit both monetary and fiscal at about the same time and about the same amount across the country. That was

the average story. Of course, not every recession is the same. In fact, they're all different in some way or another. So what's shown here is

every post-war recession since -- for both the U.S. and Oklahoma. And it shows the total job losses in each recession for both. And you'll see

that in almost all cases job losses in Oklahoma are less, which makes sense, since our recessions on average are about two

quarters less. But there are two exceptions. The first one, of course, which everyone remembers, is in the 1981-82 recession. Our job

losses during that recession were almost twice as large, and then after recovering briefly for about a year, we entered our own regional

recession over here on the right from 1984 to 1986. Why was that recession different than the previous ones? Well, the primary reason is

that energy prices stayed low after the recession instead of rising when the economy rose, which usually is what happens, and that happened

largely because of OPEC and other countries flooding the market with oil, keeping the world price of oil below what was productive in

Oklahoma for a long period of time, and we suffered through that for quite some time. What's especially significant over here on the right,

our regional recession, is that it was just a regional recession, so there was not that national policy response that I talked about earlier

being a big reason for why Oklahoma rebounds at about the same time. We were left to work through those difficulties on our own. After

that episode, Oklahoma diversified its economy considerably over the next, oh, 15 years or so, through the late 1990s, and by the late 1990s

the energy sector as a share of GDP had fallen to about 5%. It had peaked at about 25% in the late 1970s. Unfortunately, a couple of the

industries we diversified the most into in the 1990s were the two industries hit the hardest by the 2001 recession. Just pure bad luck.

One was the telecom industry, which was kind of a big bubble that burst in that recession, and the other was the aircraft industry, which of

course is what was hit hardest by 911. And that, I think explains the slightly bigger job losses we had in 2001. Since then, we have

undiversified considerably. In 2008, the energy sector again accounted for nearly 20% of GDP. Not as much as in the late 70s, and in

employment terms and in state budget terms, the increase was even less than that, but, still, we had returned to similar to our structure in

the late 1970s, early 1980s. So to me what that means is that this particular recession should look more like the old recessions and

have the same potential benefits and the same potential risks, and I think that's what we have. So what has happened in this particular

downturn, and what's happened before that and then very much up to date. Well, in recessions, especially deep recessions, I think the

official employment data becomes somewhat unreliable. I use it and I look at it to see official trends, but in recessions I like to look at data

that is a full sample that's not based on models and that is very up to date, and the best broad measure of that we have at the state level is

new claims for unemployment insurance, which come out every week. Very much up to date. So what's shown here is the last five years of

new unemployment claims for the U.S. and Oklahoma, indexed to the end of 2004. So, you can see in 2005, '06, '07, most of 2008, new

unemployment claims were running lower than the nation, meaning our economy was expanding faster than the nation throughout that

period. The U.S. economy entered into recession in December of 2007. You can see that's when claims began to rise in the nation. In

Oklahoma claims didn't begin to rise until the fourth quarter of 2008, a full three quarters afterwards. On average we enter two quarters late.

This time we actually entered three quarters late. But, then, once the recession hit, as I think everyone in this room knows, it hit with a

vengeance in Oklahoma, as well, and the rate of new jobless claims in Oklahoma matched the nation in the first quarter of 2009 and then

actually have exceeded the nation in each of the last three quarters. Although we started much later and from a much better level, the

economy here declined faster than in the nation in the second and third quarters of this year in particular. But if you'll look, the trend has turned.

In the nation, new claims for unemployment insurance appeared to peak in the second quarter of this year. Historically, the quarter after

new unemployment claims peak almost is always the quarter in which a U.S. recovery is officially said to have begun. And that -- if we

remember back to the GDP numbers, GDP began to rise for the first time in the third quarter of this year. It was one quarter after the UI

claims peak. So translating that into Oklahoma, our peak appeared to come in the third quarter of this year, one quarter delayed from the

nation, but then has improved at -- again, at about the same rate as in the nation as a whole. So adding this up, as the title suggests, we

entered this recession three quarters late. If this turns out to be true, and most indications from conversations that I have with business

folks suggest that it will, we're going to exit this recession about a quarter late, and it's not the same time as the nation because of that

same historical reason. Energy prices didn't begin to rebound at the same time as the economy. In this case it was natural gas prices.

While oil prices began to rise in early 2009, natural gas prices for a number of reasons stayed low until just very recently, and, indeed, this

cold snap we've been going through, while it's hurt some other parts of the economy, I think has been a blessing for Oklahoma as a whole,

given our still high reliance on energy. So that's one signal that the economy here is beginning to turn around. Another comes from a

survey of manufacturers that we do in our region and that is done nationally. What's shown here is that ISM manufacturing index we

showed nationally earlier that has shown some expansion in both the third and fourth quarters of this year. The solid line here shows

numbers for Oklahoma based on the survey we do at the Kansas City Fed. And you can see that while the rebound has not been as strong in

the third and fourth quarter, I think in manufacturing that's related to us no longer having auto production, which got a boost from Cash for

Clunkers. But we have seen an increase in manufacturing output in both the third quarter and especially the fourth quarter, and eventually

that has to lead to employment gains, probably in the first quarter of 2010. Most importantly, probably, the energy sector has begun rising

again. The rig count has been edging up since November, actually since October, in both Oklahoma and in the nation following a steep

decline in 2009, and reports indicate that, I think, in mid to late December, activity even began to pick up some more and optimism is

rising in the energy sector, which should lead to capital investment already occurring and hiring occurring very soon. Another sector that I

think has Oklahoma poised to at least join in with the nation in the recovery in 2010 is our housing sector. Our housing sector has

remained in much better shape than in the nation throughout this downturn. Foreclosures haven't risen nearly as much. Home prices

have not fallen much, if at all. That's what's shown here. You can see U.S. home prices gradually building into a bubble by late 2005 and

then collapsing and falling. They're still falling sharply in some parts of the country. In Oklahoma, home prices continue to grow at about the

4% to 5% long-term rate that they normally grow, kind of in line with family incomes, which in the long run is what they have to grow with.

We did see a bit of an increase in 2006 and '07, but that was that the height of the energy boom, and I think that was more economy-driven

than anything specific going on in the housing market. We have seen a slow down and a leveling off and perhaps some declines in some

areas of home prices in Oklahoma, but that again, I think, is economy-related and not specific to the housing sector. The supply of

unsold homes in Oklahoma, given the shutdown in construction that's occurred the last couple of years, is back down almost to normal.

That's not nearly the case yet in the nation, and that means to me that if we recover otherwise along with the nation, as it appears we should,

residential construction should pick up earlier here than elsewhere and that should provide a bit of a boost in 2010. Another sector

important in parts of Oklahoma is the ag sector, and unfortunately it got hit at about the same time as the energy sector. What's shown here

are a couple of indicators from a survey of ag conditions we do at the bank and it shows a steep falling off in both farm income and farm

capital spending in 2009, but some signs of a bottom in the last couple of quarters of 2009, and I think most farmers are at least a bit more

optimistic about 2010 than 2009. So, while the level of activity may remain low, it should again be an increase and provide some boost.

So with us entering recession three quarters late, appearing to exit one quarter late, conditions in Oklahoma remain much better than in the

nation. 2009 has been a very difficult year, but unemployment in the state is still at about 7%. That's three full percentage points lower than

in the nation as a whole, and much lower than in the parts of this map shown in green. This shows unemployment rates as of November,

and you can see high unemployment has really concentrated in two bands of the United States, the upper Midwest, auto manufacturing

portion, and in the southeast, that's kind of the new auto manufacturing area, and of course housing difficulties in Florida, and then of course,

the hard hit housing areas of the West Coast. Meanwhile, the -- basically the Louisiana Purchase continues to do well in relative terms.

The states in the white are where unemployment is less than 7 1/2%. The only places that's the case are in the kind of the plains, inner

mountain region, and then, of course, in areas close to Washington, D.C., for obvious reasons why unemployment hasn't risen as much

there. It actually has fallen. Meanwhile and related to the story of there being a rebound in the state at a similar time as the nation is the fiscal

stimulus package has really just begun to hit -- have it's maximum impact on the economy in the fourth quarter of '09 and first and second

quarters of 2010, and what's shown here is that only about 25 -- about a quarter to a third of stimulus spending has happened so far, so it's

still coming. And the main point of this chart, which shows per capita stimulus spending in the nation and the seven states in our district is

that the height of most of these bars is about the same. We're all getting about the same amount of stimulus. The exceptions are New

Mexico and Wyoming, which are very sparsely populated states that have a lot of roads and bridges per person, I think is the reason for

that. So, in general, things seem to be showing signs of at least bottoming out, beginning to pick up. The risk heading forward, given

how much more dependent on this industry we've become the last five to ten years, is the path of energy prices. And as I mentioned, oil prices

began to rise earlier this year and are at fairly profitable levels and have been for quite some time. Natural gas lagged. I think that's the big

reason our whole state economy lagged, but of course, have picked up in just the last couple of weeks, and I think are generally expected to

remain fairly profitable in 2010, and energy companies that I talked to are increasingly optimistic. Maybe not like we were in 2007, but I think

increasingly optimistic. So with all those better conditions, kind of as a wrap-up slide, banks in our state remain in much better shape than in

the nation. Nationally we've had a good number of bank failures. There's still a fairly sizable number of banks in the country that are

classified as problem banks by the FDIC. Both of those numbers are much smaller in Oklahoma. We've only had one bank failure. The

share of our banks that are on the problem list is less than 10%. In the nation it's nearly 25%, and it's indicated here by this data about past

due loans, the share of past due loans at national -- banks in the nation have risen to 5%. In Oklahoma they've also risen, but only risen

about half as much and so past dues are only about half as high in Oklahoma as in the nation. And if we recover along with the nation, our

banks should remain more sound as well. So just to summarize, the U.S. economy is growing again, but recovery is expected to be modest.

Oklahoma is showing some early signs of recovery and fiscal stimulus is kicking in. Still the future path of energy prices remains at risk for

later in the year. So with that, I'll stop and I'd be happy to try to address questions, if folks have them. Yes, sir.

Question:
There seems to be an unappreciated level of systemic risk in the

shadow banking area. Is it -- is there any prospect that we have other systemic risks still out there?

Chad Wilkerson:
The question is about, there was a good amount of systemic risk in the

shadow banking sector, and is that still out there. And that's -- it's a good point that you raise, given the debate going on now about

regulation in the country. The bulk of the problems in the financial crisis were not necessarily in the regulated bank sector, speaking kind of

self-promoting here regarding the Fed. Most of it was in the shadow banking system that was heavily -- largely unregulated. Part of the

regulatory reforms I think are to bring more of that part of the economy under stricter regulatory guidance, but I think it still is going to remain

less so than the regulated bank industry. And so I think we'll -- could be a risk heading forward. One of the things our president has spoken out

on a lot lately is the problem of too big to fail institutions, both banks and non-banks, and the risk that those pose if we don't rein them in

either by breaking them up, increasing their capital requirements heading forward. So, that's an ongoing debate in Congress now about

how to get a better overall oversight of the whole financial industry. There were some problems within regulated banks certainly. I showed

the past due loans, the number of problem banks, but I think the bigger problems were among the largely unregulated portion of the economy.

Yes.

Question:
What point do you expect the credit to loosen up a bit with businesses?

Chad Wilkerson:
The question is at what point do I expect credit to loosen up a bit for

businesses. That's kind of the question of the year, I think, for 2010. And I showed that the chart of the tightening of lending standards

continued on into the fourth quarter of last year, the early part of the fourth quarter, but it was a much smaller share of institutions

continuing to tighten, and some signs of some leveling off. And I think it will just be a function of how strong the fundamentals of the economy

begin to pick up. Some of that, of course, is related to availability of credit, but I would expect that to continue to improve throughout 2010,

although, again, probably not for good reasons returning to the levels we saw in 2004 or '05, or that might have created some of the

difficulties we have now. Yes, in the back.

Question:
(Inaudible.) I don't understand in (inaudible).

Chad Wilkerson:
The question is, one of the roles of the Federal Reserve is to promote

maximum sustainable employment. The Congress has charged the Fed, in addition to our role with financial stability, with promoting both

low and stable inflation and maximum sustainable employment. And like I mentioned, that's a bit different than some central banks that

focus just on keeping the inflation rate low with the idea being if inflation is kept low, that's the best environment in the long run for

maximum sustainable employment. And I think, in effect, that's how the Fed views our role with employment, in that the best way to foster

long-term sustainable employment is to have low and stable inflation, so that's the order in which we look at things, but when we have to

testify before Congress, they hold us responsible for both, and, so, that's the order we usually go with. To focus more on employment, as

some central banks around the world have done in the past, especially if you ignore the inflation side of things, that would argue for lower

interest rates, easier credit would create jobs, more jobs in the short run. But the emphasis is on the short run because the

intermediate-term problem would be inflation such as we had in the 1970s and that in the long run would actually be worse for employment

than if we hadn't tried -- if we had tried to maintain inflation in the short run. Yes.

Question:
How big of a risk do you think the seeming inability -- fiscal policy to be

managed is a problem for monetary policy? In other words, how big of a problem is the continuing -- continued rate of growth to cover deficit

and how does it play on the sustainability of this government?

Chad Wilkerson:
The question is a very good one about fiscal responsibility, what

pressure does the growing federal deficit place on being able to conduct monetary policy. And Chairman Bernanke speaks about this

regularly. Our president, Tom Honig, even makes comments about the need to have not just a plan for keeping the economy out of the abyss,

but for how to pay for those obligations heading forward and wind those down. And that is a concern that we have. And actually it's not just

a short-term concern related to the expansion of the deficit during this downturn. Really overwhelming that in the next 20 years or so is the

obligations the country has especially for Medicare but also Social Security, and there not being a plan out there for how to keep that

portion of the federal deficit from growing larger, and the impact on monetary policy is that has the impact of pushing up longer term

interest rates which makes our job more difficult, since our tool is really usually with just adjusting short-term interest rates. So it is a concern,

something that I think we would be very much in favor of hearing at least what the plan is to reduce that future burden.

Question:
That was kind of the follow-up. I mean, what I hear you say is that since

you've done all that you could realistically do, you got interest rates basically all the way to zero, the tools in your toolbox are pretty much

empty at this point, because you can't lower interest rates any more, and so the sustainability of the recovery, using monetary tools, is going

to be -- it' more limited.

Chad Wilkerson:
I think you -- I think that's a mostly true statement. One thing in addition

to lowering the interest rate that we can do is expand our balance sheet, such as we've done. We can make arguments about the

effectiveness of that. That generally doesn't have as big of an impact as the actual reduction in the interest rate, but the expansion of credit in

that way has been a tool we've -- I think helped the economy from falling further than it otherwise would have. But your point I think is still

valid. As long as the economy is not showing clear, definite signs of solid expansion, there's little more, I think, that the Fed can do.

Question:
Aren't the remedies available for fiscal policy likely to be economically

dampening? You know, the remedies for fiscal policy are either tax increases or reduce government spending, which will likely dampen

the recovery, right? Or am I wrong?

Chad Wilkerson:
No, that's right. It would depend on the timing. It depends on how long

we continue to expand the fiscal situation, which I think most economists would agree in a deep recession is justifiable. It's more

the, what's the plan for the future that hasn't been laid out, and as long as there's uncertainty about that, it makes it difficult to see a clear

sustainable path for the economy in the long run. Yes.

Question:
Kind of piggy-back on that, when you mention the uncertainty about

how these long-term obligations are (inaudible) the rest (inaudible) any discussion about how to address, for instance, Medicare, Social

Security (inaudible) obligations (inaudible) deficit or (inaudible)? What about the near-term uncertainty? What are taxes going to look like?

What is, you know, (inaudible) medical (inaudible) and how that's going to affect people economically and especially business climate,

because businesses don't know what to expect, you know, mandated obligations and so forth. It's going to be very expensive, it looks like,

increasingly. Right now, they don't know (inaudible).

Chad Wilkerson:
I think that's a very key issue that you raise and I think one of the things

we continually do both with our directors' and other surveys that we do is ask about future plans. You can't get that from the data. And you can't

rely totally on models of how it might work. You have to talk with firms about what are your capital spending plans, what are your hiring plans.

We did that just last week at our board meeting. And one of the key issues in 2010, especially related to hiring, is what are the future rules

of the game going to be. I think that's been a big issue throughout this downturn and in a sense it's always the case in a downturn. There's

just uncertainty. You don't know exactly the policy prescriptions immediately. But I think for 2009, that's a big risk, especially for

employment -- is the uncertainty firms have about what the cost of employees is going to be. Just put it in blunt terms. So I think the

sooner -- so long as its wise -- what -- knowledge about what the rules are going to be I think will help the economy move along. I think the

same could be said for other things, for financial reform, for cap and trade. There's just a lot of uncertainty out there related to big pieces of

legislation, that I really don't have any comment on, the legislation itself. It's just the uncertainty about them being out there. Could be one

of the reasons the recovery in 2010 will be modest.

Question:
(Inaudible) employment substantially or expensive that could still press

the recovery in terms of (inaudible). Even if tomorrow they (inaudible), here's what's going to happen, (inaudible).

Chad Wilkerson:
It could impact employment, but that's kind of a political decision

outside of our purvey. We kind of react to those political decisions. Any other questions? Yes, sir.

Question:
Outside of (inaudible) that you talked about, what would you say are

other industries that really could have a short-term, mid-term effect on the Oklahoma economy that would cause a tipping point in either

direction?

Chad Wilkerson:
The question's about what other industries besides energy could

create a tipping point for the Oklahoma economy in 2010, one way or the other. Well, one of them I mentioned is the housing sector. I think

we have some upside risk in housing. Upside risk isn't the word. Upside potential in the housing construction industry because our

supply of homes is much less than the nation and we're getting the same stimulus for housing that everyone in the nation is getting. So I

think in the near term that's an upside potential risk for Oklahoma. Another one might be agriculture. Commodity prices have begun rising

again. You could argue about whether that's good, bad, what's causing it, but they are nevertheless rising I think on net that could be a positive

for agriculture in 2010. We're not as wide on agriculture as we used to be, but it's still a fairly important industry in parts of the state. You know,

one part of the economy that is going to grow, policy-driven, in the next couple of years, is green technology-related projects: wind energy,

other types of alternative energy. I think Oklahoma should be fairly well positioned relative to the nation in several of those things, especially

wind, but I think just in general, given our long-term energy expertise. Manufacturing: we may have less -- well, it probably about balances out

on manufacturing. We don't have autos. I think the auto sector has to grow in the next couple of years. People just didn't buy cars for two

years, and they need to buy cars. And we don't have that, so that's going to be a relative negative, but if the energy sector begins

increasing as I'm increasingly hearing, that will result in some increases in energy-related manufacturing, as well. And, then, kind of

intermediate, longer term, I think the focus we have on some of the high tech sciences here in Oklahoma City in particular, I think that's

nothing but upside for us. Well, thank you all very much.