Economic Letter

In September of 1995 the Bank of Japan (BOJ) reduced its discount rate to 0.5 percent, a post-war low not only for Japan, but for the entire OECD. The usual interpretation of interest rate movements would imply that the BOJ has been engaged in an aggressively expansionary monetary policy, as lower interest rates tend to stimulate demand.

A rising tide raises all ships. That is good news for community banks in California, where the economic tide continues to flow in after the pronounced ebb of the past recession.

During 1995, the credit card charge-off ratio at banks rose sharply, almost a full percentage point. This surprised some observers, since 1995 was the fourth year of economic expansion in the U.S.

The previous issue of the Economic Letter discussed the relationship between the movements in the stock and bond market, at the macroeconomic level. How stock and bond prices move relative to each other is important because it directly affects the risk of a portfolio that contains both kinds of long-term assets.

Stocks and bonds have very different risk-return characteristics. In general, while stocks are more volatile than bonds, over the long run, stocks are expected to yield higher returns than bonds.

This Economic Letter is adapted from a speech given by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, to the 31st Conference of the Governors of Southeast Asian Central Banks in Singapore on May 8, 1996.

Last week’s Economic Letter (96-16) explored the controversy surrounding the recent estimates of the U.S.’s potential growth rate. It focused particularly on the fact that a slowing in the labor force participation rate is probably the main reason for the slowing in the potential growth rate in the 1990s.

A controversy about the national economy has been in the headlines recently. For example, in the Christian Science Monitor, one headline was “What’s the Economic Speed Limit?” As if in answer, the New York Times featured an article entitled “It’s a Slow-Growth Economy.”

This Economic Letter is adapted from a speech delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, to the annual meeting of the National Automated Clearing House Association in San Francisco on April 17, 1996.

Economic conditions in most of the District were healthy in 1995, and that helped District banks generate record profits. Employment growth expanded even more rapidly in the District than in the nation; in fact, of the nine District states, five–Nevada, Utah, Oregon, Arizona, and Idaho–ranked in the top ten for nonagricultural employment growth.