Economic Letter

Oil prices have increased substantially over the last several years. When oil price increases of this magnitude occurred during the 1970s, they were associated with severe recessions. Why hasn’t that happened this time around? This Letter explores some answers to that question.

In September 2005, the personal saving rate out of disposable income was negative for the fourth consecutive month. A negative saving rate means that U.S. consumers are spending more than 100% of their monthly after-tax income.

Whether depository institutions can achieve economies of scale, that is, lower their average costs by increasing their sizes, has been a subject of great interest and importance to economists, regulators, and depository institutions themselves. Deregulation has allowed banks, thrifts, and credit unions to increase their size—and, thereby, to reap whatever economies of scale have long been available to larger depositories—by easing restrictions on their abilities to acquire other financial institutions and to operate over broader geographic areas.

Oil prices have risen sharply over the last year, leading to concerns that we could see a repeat of the 1970s, when rising oil prices were accompanied by severe recessions and surging inflation. This Economic Letter examines the historical relationship between oil price shocks and inflation in light of some recent research and goes on to discuss what the recent jump in oil prices might mean for inflation in the future.

On September 20, the Federal Open Market Committee, the nation’s monetary policymaking body, raised its target level of the federal funds rate by 25 basis points, the eleventh straight increase over the last fifteen months. The statement released immediately after the meeting said, “With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

Tax credits for spending on research and development (R&D) were first enacted into federal law in the U.S. in 1981. In the ensuing quarter century, many states have adopted such tax credits, often using the federal tax credit as a model.

The Federal Reserve wants to know what people think—specifically, the Fed wants to know what people think the future path of inflation is. One reason is that people’s expectations about inflation influence their behavior in the marketplace, and that, in turn, has consequences for future inflation.

Over the past twenty years, output growth in the U.S. has become noticeably less volatile. During that time, the economy has experienced two recessions, compared with four in each of the two preceding twenty year periods.

On July 21, 2005, after more than a decade of strictly pegging the renminbi to the U.S. dollar at an exchange rate of 8.28, the People’s Bank of China (PBOC 2005a) announced a revaluation of the currency and a reform of the exchange rate regime. The revaluation puts the renminbi at 8.11 against the dollar, which amounts to an appreciation of 2.1%. Under the reform, the PBOC will incorporate a “reference basket” of currencies when choosing its target for the renminbi.

This Economic Letter is adapted from remarks by Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, delivered at the Twelfth International Conference, “Incentive Mechanisms for Economic Policymakers,” at the Institute for Monetary and Economic Studies at the Bank of Japan in Tokyo on May 31, 2005.