Economic Letter

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.

In recent years, there has been growing interest in the causes of speculative pressures on currencies, stimulated by the attack on the exchange rate mechanism of the European Monetary System in September 1992 and more recently by the devaluation and float of the Mexican peso in December 1994. In a number of Asian economies, interest in speculative pressures has recently been heightened by concern about the possible reversal of the vast foreign capital inflows they have experienced in the last decade (see Glick and Moreno 1995).

The European Community (EC) implemented the framework for a single European market for retail banking services in 1993. The integrated market was expected to increase competition and financial integration in EC financial services, much as interstate banking and branching is expected to increase competition in many U.S. banking markets.

This Letter summarizes the papers and discussion at a conference that was held at the Federal Reserve Bank of San Francisco on March 1 under the joint sponsorship of the Bank and Stanford University’s Center for Economic Policy Research.