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Economic Review
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If we are to modernize our regulatory system and allow banks the flexibility to adapt to financial change, it is essential that we ask the right questions about the purposes of bank regulation. Currently, much of the regulatory debate focuses on the age-old question: Where do we draw the line between banks and other financial and nonfinancial institutions? As important as this question is, however, it begs a more fundamental question: Why do we regulate banks differently than other institutions? Unless we can answer this basic question, it is possible that we may never achieve consensus on fundamental reform and will continue to rely on an incremental, reactive approach to bank regulation. In an article based on comments made at the 1996 Federal Reserve/Deloitte Touch Banking Symposium in Houston, Mr. Hoenig suggests that we need to look beyond traditional arguments for bank regulation that focus on protection of bank depositors and the federal safety net. In his view, a compelling reason for bank regulation is to maintain the integrity of the payments system. Focusing on the payments system provides us with insight into two aspects of the current debate over bank regulation. First, the payments system gives us a clear rationale for drawing lines between banks and other financial institutions. Second, focusing on the payments system may provide new ideas on how we should regulate banks as we move into the next century. Back to top Economic Review home
The primary goal of Federal Reserve monetary policy is to foster maximum long-term growth in the U.S. economy by achieving price stability over time. Price stability will be achieved, according to some definitions, when inflation ceases to be a factor in the decision-making processes of businesses and individuals. Although the Federal Reserve has made considerable progress toward price stability since the early 1980s, inflation remains above the level most analysts would associate with price stability. Because stable prices are essential to maximum long-term economic growth and living standards, the Federal Reserve seeks to contain and gradually reduce inflation until price stability is attained. Clark reviews inflation developments in the United States during 1996 in relation to the Federal Reserve's goal of achieving price stability over time. He first examines the behavior of inflation over the past year, showing that sharp increases in food and energy prices caused most overall inflation measures to rise, while inflation in nonfood and nonenergy prices slowed. Second, he shows that expectations of future inflation held steady at about the current rate, indicating the public expects no further progress toward price stability. Finally, he evaluates some inflation measurement issues raised in 1996, concluding that problems in accurately measuring inflation will require the Federal Reserve to monitor all price trends with vigilance. Together, the inflation developments of the past year were mixed. Back to top Economic Review home
Continuing gains in labor productivity are essential to keep real wages and the U.S. standard of living from stagnating. After a period of strong gains in the 1960s, the average growth rate of productivity slowed substantially in the early 1970s. In the following years, productivity continued to grow slowly despite rapid technological advances in such areas as computers and digital communications. Analysts have proposed differing explanations for the productivity slowdown and for the failure of productivity growth to rebound in recent years. Most explanations focus on aggregate factors, such as overall saving and investment rates or the quality of the labor force. Kozicki approaches the productivity growth slowdown from a different perspective. In particular, she decomposes the slowdown into contributions by broad sectors of the economy, focusing on the two largest sectors manufacturing and services. Doing this reveals that the main factor accounting for the productivity slowdown has been stagnating productivity in the service sector. An accompanying and reinforcing factor has been the strong employment growth in services relative to manufacturing. Back to top Economic Review home
The Tenth District economy grew at a moderate pace during 1996. The district economy expanded vigorously in early 1996 but slowed as the year progressed. Tight labor markets in many parts of the region appeared to limit job growth, particularly in the large trade and services sectors. A slumping cattle industry also curbed overall growth in parts of the district. Nonetheless, construction continued to post healthy gains, energy activity improved somewhat, and manufacturing across the region remained stable. Smith reviews the district's economic performance in 1996 and explores the outlook for 1997. In the year ahead, the district economy will probably continue to grow moderately, about equal to the 1996 pace. Tight labor markets will continue to constrain growth in many parts of the district. District manufacturing will likely remain stable, while trade and services continue to expand at a more sustainable, moderate pace than in previous years. Construction activity may moderate, but the farm economy is expected to improve somewhat, reflecting relatively strong prices and an improving outlook for the cattle industry. Back to top Economic Review home
U.S. agriculture formally entered a new era in April 1996 when a new seven-year farm bill was signed into law overturning 60 years of commodity programs. The new bill set agriculture on a new course where markets, not government programs, will determine agriculture's products and its bottom line. The new path was underscored by one of the wildest years in commodity markets in recent memory. Grain prices soared to new heights, while cattle prices sank to new lows. The market swings pointed to the variations in income that agriculture may experience under the new farm bill. Nevertheless, a new record for U.S. agricultural exports also suggested that the market trend for the industry is decidedly up. For most of U.S. agriculture the year just past was a good one. Crop producers had a banner year, with high prices and the first year of transition payments under the new farm bill. In contrast, livestock growers had a difficult time due to high feed costs, with problems especially pronounced for cattle producers. In the end, the boost to crop producers prevailed, and U.S. farm income was up sharply, while increasing much less in the district due to the cattle situation. Drabenstott reviews the year just past for U.S. agriculture and suggests the year ahead should be another good one, though probably not as good as 1996. A bigger than expected 1996 harvest will weigh on crop markets, keeping prices below 1996 levels. Still, the 1997 harvest will have a major bearing on prices since grain stocks remain low by historical standards. The lower crop prices will help fatten livestock profits, and the livestock industry could have its best year in the past four. Overall, farm income will probably decline in the nation but remain relatively strong. In the district, where cattle profits are particularly important, farm income will probably rise. With export markets staying strong and commodity markets more settled, agriculture will generally have smooth sailing in the new market era. |