Economic Letter

One common misperception about monetary policy is that the Federal Reserve controls all interest rates. In fact, the Fed controls only a very short-term rate, the federal funds rate; this is the rate banks charge each other for overnight loans of reserves.

Economists generally agree on the importance of low and stable inflation as a primary goal of monetary policy, as well as on the key role of inflation and forecasts of future inflation in providing critical signals to which the Fed needs to react. Economists also agree that the measure of real activity relevant for monetary policy is the gap between the level of actual output and an underlying trend level of output.

Among the many challenges the new Iraqi government will face is the choice of a monetary regime that will promote price stability, an essential element in any well-functioning market economy. In forming its new government, Iraq has a rare opportunity to choose the monetary regime that will best suit its unique characteristics.

This Economic Letter summarizes papers presented at the conference “Finance and Macroeconomics” held at the Federal Reserve Bank of San Francisco on February 28 and March 1, 2003, under the joint sponsorship of the Bank and the Stanford Institute for Economic Policy Research.

Since the 1997-1998 Asian financial crises, monetary authorities in emerging markets in East Asia have more than doubled their stockpiles of foreign exchange reserves; by the end of May 2002, they held $845 billion, or 38% of the world total. Of these countries, China, Taiwan, Hong Kong, South Korea, and Singapore rank just behind Japan as the world’s biggest holders of foreign exchange reserves–together those five countries hold reserves totaling nearly $700 billion.

Over the past 20 years inflation in the U.S. economy has been relatively low, averaging about 2.5%; moreover, it has been relatively stable, with a standard deviation of just 1.0%. These statistics may give the impression that inflation has been tamed, or even beaten into submission.

As the bull market of the 1990s has turned into the bear market of the (early) 2000s, households have sharply reversed their more than decade-long trend of increasing their share of assets held in stocks. On balance, households have reallocated their assets away from stocks and toward tangible real assets, such as housing and other durable goods, as well as toward safe liquid financial assets, including cash, bank deposits, and money market mutual funds.

This Economic Letter summarizes the papers presented at the conference “Technological Change,” held at the Federal Reserve Bank of San Francisco on November 14-15, 2002, under the joint sponsorship of the Bank and the Stanford Institute for Economic Policy Research.

This Economic Letter is adapted from remarks by Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco, delivered to the Stanford Institute for Economic Policy Research Associates on the campus of Stanford University on March 4, 2003.

The possibility of a “bubble” in house prices has received considerable attention lately. To be sure, house price appreciation has been strong in spite of the slowdown in the economy.