Monetary Policy Report to the Congress
The economic expansion in the United States
gathered strength during 2003 while price inflation remained quite
low. At the beginning of the year, uncertainties about the economic
outlook and about the prospects of war in Iraq apparently weighed on
spending decisions and extended the period of subpar economic
performance that had begun more than two years earlier. Over the
second half of the year, in the absence of new shocks to economic
activity and with gathering confidence in the durability of the
economic expansion, the stimulus from monetary and fiscal policies
showed through more readily in an improvement in domestic demand.
Spurred by the global recovery in the high-tech sector and by a pickup
in economic activity abroad, U.S. exports also posted solid increases
in the second half of the year.
Still, slack in resource
utilization remained substantial, unit labor costs continued to decline
as productivity surged, and core inflation moved lower. The performance
of the economy last year further bolstered the case that the faster
rate of increase in productivity, which began to emerge in the
late 1990s, would persist. The combination of that favorable
productivity trend and stimulative macroeconomic policies is likely to
sustain robust economic expansion and low inflation in 2004.
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Summary of Papers Presented at the Second Conference of the International Research Forum on Monetary Policy
The International Research Forum on Monetary Policy
held its second conference on November 14 and 15, 2003. The
organization is sponsored by the European Central Bank, the Board of
Governors of the Federal Reserve System, the Center for German and
European Studies, and the Center for Financial Studies. It was formed
to encourage research on monetary policy issues that are relevant from
a global perspective, and it organizes conferences that are held
alternately in the euro area and the United States.
The 2003 conference, held in Washington, D.C., featured ten papers.
Among the topics examined were the Great Inflation of the 1970s in
the United States and the influence of learning, or adjustment of
expectations, on policy outcomes; the tradeoffs between rules-based and
discretionary monetary policy; the 1999 formation of the European
Economic and Monetary Union and whether it altered the degree of
economic integration between the United States and the euro area; the
potential benefits of greater competition in the euro area; and optimal
monetary policy in an international setting.
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Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003
Mark Carlson and Roberto Perli
Amid a strengthening economic expansion, U.S.
commercial banks remained highly profitable in 2003. Return on assets
reached a record level for the second year in a row, and return on
equity was near the top of its recent range. Banks' profits were
bolstered by decreased loan-loss provisions as a rising economy and
considerable debt refinancing at very low interest rates led to lower
delinquency rates on business and household loans. Fees associated with
record mortgage refinancing activity and robust corporate bond issuance
boosted non-interest income. Increases in non-interest expense were
generally modest, although compensation-related costs rose more
briskly. Lower long-term interest rates in the first part of the year
allowed banks to realize gains on the sale of some of their securities,
but they also contributed to a further shrinking of net interest
margins. Banks' balance sheets expanded briskly, as the strong housing
market and heavy refinancing activity boosted residential mortgages and
mortgage-backed securities. Business loans ran off for a third
year, albeit at a slower pace than in 2002 and 2003. Banks' regulatory
capital positions strengthened further, as the growth of assets with
low regulatory risk weights outpaced that of assets with higher risk
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Report on the Condition of the U.S. Banking Industry: Fourth Quarter, 2003
Assets of reporting bank holding companies expanded
$130 billion, or 1.6 percent, in the fourth quarter of
2003. Asset quality showed further improvement. Net income rose to
$28.3 billion for the fourth quarter and to more than $100
billion for the year. Net interest margins recovered slightly for
the quarter, having sustained steady contraction since late 2001. All
of the aggregate quarterly earnings gains occurred at the "fifty
large" bank holding companies, while aggregate earnings at "all
other" bank holding companies declined slightly in the fourth
quarter as they had in the third quarter.
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Press releases and Board staff changes for the previous quarter.
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Various bank holding company, bank service corporation, and bank merger orders.
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