Economic Letter

Today the Federal Open Market Committee is a good deal more transparent about its policy actions and deliberations than it was only 15 years ago.

The recent sharp increase in subprime mortgage delinquencies has captured the public spotlight and led analysts to search for the factors that are likely to have contributed to the problem. These factors commonly include the lack of income documentation, high loan-to-income ratios, the lowering of credit standards, and the resets on adjustable-rate loans, to name but a few.

In recent years, the U.S. economy has expanded at a healthy pace, employment has grown substantially, and the unemployment rate has dropped to very low levels. Despite these favorable trends, some recent news stories have emphasized worker anxiety and uncertainty about their job stability and security, reinvigorating a theme that gained substantial prominence in the mid-1990s.

This Economic Letter summarizes the papers presented at a conference on “Monetary Policy, Transparency, and Credibility” held at the Federal Reserve Bank of San Francisco on March 23 and 24, 2007. The papers are listed at the end and are available online.

The U.S. bank supervisory agencies recently issued for public comment revised guidance regarding the implementation of the proposed Basel II-related, risk-based capital requirements. Among the revisions is an important update to guidance regarding operational risk management.

The European Central Bank (ECB) and the Federal Reserve share a similar goal, price stability, and their strategies to pursue their goals are similar–with one notable difference. When considering long-term risks to price stability, the ECB places an explicit emphasis on the link between prices and measures of the money supply (also known as monetary aggregates); the Federal Reserve System, in contrast, does not specifically emphasize monetary aggregates.

Strong productivity growth is essential for improving living standards and can have an important impact on economic policy, yet economists are far from being experts at predicting when the trend of productivity growth might shift. In the 1960s, productivity growth boomed, growing at an average annual rate of 2-1/2%. It weakened in the early 1970s, and for the next two decades or so averaged an annual growth rate of only about 1-1/4%.

On March 14, the Bureau of Economic Analysis reported that the U.S. current account deficit for 2006 increased from the previous year to over 6% of GDP. This deficit reflects the difference between U.S. income and expenditures, and the additional indebtedness that the country needs to take on to cover this difference.

While China’s economic reforms have engendered much success since they were undertaken in the late 1970s—real GDP growth has averaged roughly 10% per year over the period—the development of its financial system arguably lags behind. Very high investment (over 40% of GDP) has fueled much of the recent growth, but, as some claim, it also has generated excess capacity in the economy, a sign of inefficient allocation of capital.

Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.