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Economic Review
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The primary goal of Federal Reserve monetary policy is to foster maximum long-term growth in the U.S. economy by achieving price stability over time. Price stability will be achieved, according to some definitions, when inflation ceases to be a factor in the decision-making processes of businesses and individuals. Although the Federal Reserve has made considerable progress toward price stability since the early 1980s, inflation remains above the level most analysts would associate with price stability. Because stable prices are essential to maximum long-term economic growth and living standards, the Federal Reserve seeks to contain and gradually reduce inflation until price stability is attained. Clark reviews recent inflation developments in the United States in relation to the Federal Reserve's goal of achieving price stability over time. First, he examines the behavior of inflation over the past year and finds that all major measures of inflation declined, to the surprise of most observers. Second, he shows that forecasters expect a healthy economy and an unwinding of some of the factors slowing inflation last year to produce slightly higher inflation in 1998. Third, he evaluates the behavior of long-term inflation expectations over 1997 and concludes that the public has become more optimistic about long-term inflation prospects. Together, these findings suggest the Federal Reserve made some headway in lowering inflation last year but will need to remain vigilant if it is to achieve price stability over time. Back to top Economic Review home
U.S. agriculture had a very good year in 1997, with profits widely shared among the nation's farmers. While few producers could boast of bell-ringer profits, as they did in 1996, nearly all could claim a good year. The year was especially welcome to the nation's cattle producers, who had struggled through an extended period of losses. The cattle industry rebounded much faster and further than anyone expected. While Mother Nature did bring major flooding to the Northern Plains states in late spring, most parts of the nation had good growing conditions in 1997. The result was an abundant harvest of the major crops and a moderate slide in crop prices. All in all, farm income was strong, but not as strong as the year before, and agriculture's balance sheet was bolstered further by gains in farmland values. Drabenstott and Lamb review the year just passed for U.S. agriculture and suggest the year ahead will be another solid one, although income will probably slip from 1997 levels. After a big harvest last year, U.S. grain bins are fuller than they have been in three years. Moreover, the turmoil in Asian financial markets is likely to trim export demand for U.S. food and agricultural products in the year ahead. Profits in the livestock industry should continue, but fall somewhat from last year's level. Pork prices, in particular, may be under some downward pressure due to a buildup in pork supplies and a tailing off in export demand. One major wild card in the 1998 outlook is El Ni¤o. While current forecasts suggest little impact on 1998 crop production, much depends on when and how quickly El Ni¤o weather conditions fade. World grain stocks are still small enough that any crop shortfall could send prices sharply higher. Barring a major weather disruption, however, U.S. agriculture appears headed toward a solid year in 1998. Back to top Economic Review home
The Tenth District economy posted lower employment growth in 1997, marking the first time since 1988 that the district underperformed the nation. District agriculture posted solid gains in 1997, with big harvests and major improvements in the cattle industry. Overall, labor markets remained tight in most of the district, most likely limiting job growth in the region. Gazel reviews the major economic developments in the district economy in 1997 and examines the outlook for 1998. The district economy is likely to grow moderately this year, nearly matching the 1997 pace. Tight labor markets throughout the district and slower growth at the national level will be major factors behind the slowdown. The region's economic growth in 1998 will be well-balanced. Manufacturing activity is likely to expand at the same pace as 1997, driven by gains in the production of durable goods. The service sector should grow moderately again in 1998, supported by solid performance in business and professional services. Retail and wholesale trade may be slowed by lower job and income growth across the district. Construction activity may weaken in 1998, although housing may improve somewhat. The district farm economy should remain relatively strong in 1998. Back to top Economic Review home In 1997, the U.S. Treasury began the quarterly issuance of inflation indexed bonds, called Treasury Inflation Protection Securities (TIPS). So far, the Treasury has issued both 5-year and 10-year indexed bonds and will begin to issue 30-year indexed bonds and inflation indexed savings bonds in 1998. TIPS differ from conventional Treasury bonds in both their payment flows and risks. With virtually no inflation risk, they are the safest assets currently available in the U.S. market. Combined with conventional Treasury bonds, they allow investors to separate inflation risk from real interest rate risk and thus manage risk more efficiently. To help investors understand and take full advantage of these new securities, Shen discusses the features and risks of the Treasury inflation indexed bonds. She explains why these bonds can benefit many investors and shows how the tax code prevents these bonds from being entirely inflation-risk free. Finally, she shows that historically the market risk of an indexed bond has been small compared to that of a conventional bond with similar maturity. |