Economic Letter

The Japanese government and the Bank of Japan (BOJ) are both considering the merits of conducting that nation’s monetary policy by pursuing an explicit inflation target. However, they seem to view inflation targeting as a means to quite different ends, which leads them to different conclusions about the proper timetable for a move towards such a regime.

After more than two decades of debate, full affiliation of commercial banking with other financial services became a reality in March 2000. The Gramm-Leach-Bliley Act (GLBA), signed into law last November, authorized the certification of financial holding companies, the structure that looks to be the main vehicle for linking commercial banks with securities firms, insurance firms, and merchant banking.

The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market.

Uncertainty is pervasive in the policy environment the Federal Reserve faces as it strives to promote economic stability and low inflation. The economic situation in the U.S. today shows that, even in the best of times, making monetary policy isn’t easy.

The rush to find gold brought about 100,000 people to California from 1847 to 1849. A century and a half later, many Californians participated in another rush to entrepreneurial gold. But this time, Californians prospected for firms that would hire them as employees and allow them to share in the bounty of a successful initial public offering (IPO) of equity.

The U.S. unemployment rate averaged 4.2% in 1999, and dropped to 4.0 % in January 2000, the lowest rate recorded since January 1970. The sustained labor market tightness in this expansion has raised concerns that a shrinking pool of available labor may constrain firms’ ability to expand employment and output further.

The growth rate of the potential supply of output–“potential output” for short–determines the long-run sustainable pace of economic expansion and is thus an important consideration for monetary policymakers. For example, as noted in the Federal Reserve press release following the most recent meeting of the Federal Open Market Committee: “The Committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth.

The U.S. Treasury market is the largest and most active debt market in the world with about $3.6 trillion of tradable securities outstanding as of September 1999. Treasury securities are traded almost around the clock, starting in Tokyo, then moving to London, and then on to New York. Given this market structure, the prices and hence the yields on Treasury securities can readily incorporate economic announcements and other developments when they become known.

In 1999, eleven European nations created a common currency zone, known as the European Economic and Monetary Union (EMU). These countries have relinquished national monetary control and adopted the euro as their official currency.

Traditionally, commercial real estate financing has not been well integrated with capital markets. Ownership has been concentrated, with wealthy individuals and large institutions such as insurance companies and pension funds as the primary investors in commercial real estate.