Economic Letter

In recent years, a debate has re-emerged about whether the Federal Reserve should pay attention to the “NAIRU” in conducting monetary policy. NAIRU is an acronym for “non-accelerating-inflation rate of unemployment” (a closely related concept is the “natural rate of unemployment”).

Since early 1996, the U.S. economy has produced a combination of very low unemployment and stable or declining inflation. Many analysts and pundits regard this performance as surprising, because similar sustained low unemployment rates have been associated in the past with rising inflation.

After more than a decade of maintaining the Thai baht’s near-peg to the U.S. dollar, Thai authorities abandoned the peg on July 2, 1997. By October 24, market forces led the baht to depreciate by 60% against the U.S. dollar.

This Economic Letter is adapted from remarks delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, at a conference sponsored by the Graduate School of Management at the University of California, Davis, on October 17, 1997, entitled “The October ’87 Crash: What Have We Learned about the Causes and Consequences of Large Market Movements?”

Concern over extending the federal safety net is a perennial issue in legislative measures to allow greater integration of banking and other financial services. And, it remains central to the testimony on financial modernization in the current session of Congress.

The economy has been performing extraordinarily well recently. Output has grown at a robust rate, and inflation and the unemployment rate are down to levels not seen in several decades.

From 1896 to 1970 the United States had a continuous string of surpluses in its balance of trade (in goods and services). Since the late 1970s it has had a continuous string of deficits.

Central banks are now placing greater emphasis on maintaining low inflation, and this raises the question: How low should inflation be? Some say that the current level of inflation is acceptable, while others argue that inflation should be pushed toward zero.

The Bank of England, established in 1694, is one of the world’s oldest central banks. It is affectionately known as the “Old Lady of Threadneedle Street,” having operated continuously at that location in the City of London since 1734.