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Federal Reserve Bank of St. Louis. "Central Banker, Spring 2006," Central Banker : News and Views for Eighth District Bankers (April 2006). https://fraser.stlouisfed.org/title/6284/item/603090, accessed on May 19, 2025.

Title: Central Banker, Spring 2006

Date: April 2006
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image-container-3 Regional Roundup Resources for Displaced Hurricane Victims Last summer’s hurricanes dis- placed thousands of people from the Gulf Coast; some of them settled temporarily or perma- nently in the Eighth District. If hurricane refugees are among your new customers, you can help them with their fi nancial diffi culties during the coming tax season by directing them to several resources such as Opera- tion HOPE and the Internal Revenue Service. They have set up hot lines to assist those with questions about fi nancial mat- ters or federal taxes. Trained volunteers from the banking, insurance, mortgage, fi nance and accounting industries provide free, one-on-one counseling through two call centers run by Operation HOPE at 1-888-388- HOPE (4673). Callers can get information on emergency credit management, deferring loan pay- ments, fi ling insurance claims, locating lost documents and applying for federal or private assistance. Hurricane victims can also fi nd a wealth of tax-related information at www.irs.gov and can call a special IRS disaster hot line at 1-866-562-5227. Meanwhile, the Board of Gov- ernors of the Federal Reserve System, several federal agencies and state fi nancial regulators are encouraging banks, thrifts and credit unions to continue to work with borrowers affected by the hurricanes. Assistance may include waiving fees, lowering interest rates, extending repay- ment schedules, or deferring principal or interest for an addi- tional period, where appropriate. For these options to be consid- ered, however, it is essential that the borrower contact his or her lender. Additional guidance is available at the Federal Financial Institution Examination Coun- cil’s web site, www.ffi ec.gov. Learn How To Spot New $10 Bill When the new $10 bill comes out, will your institution be ready to tell the fakes from the real deal? Eighth District com- mercial banks will be among the fi rst to receive the new bills, starting March 2. The new $10 note—like the previously redesigned $20 and $50 notes—incorporates state- of-the-art security features to combat counterfeiting, including three that are easy to use by cash handlers and consumers alike: • Color-shifting ink: Tilt the bill to check that the numeral “10” in the lower right-hand corner on the face of the note changes color from copper to green. • Watermark: Hold the note up to the light to see if a faint image of Treasury Secretary Alexander Hamilton appears to the right of his large portrait. It should be visible from both sides of the note. On the redesigned $10 note, it is easier than ever to locate the watermark: A blank oval has been incorporated into the design to highlight the watermark’s location. • Security thread: Hold the note up to the light and make sure there’s a small strip that repeats “USA TEN” in tiny print. It should run vertically to the right of the portrait. Learn more from the Treasury at www.moneyfactory.gov/ newmoney/. Seasonal Credit Is Available for Banks At this time of year, the Federal Reserve reminds insti- tutions that qualifying commu- nity banks may receive seasonal credit to help them meet the seasonal needs of their customers. Community banks that experi- ence yearly fl uctuations in their deposits and loans—caused by construction, farming, college or resort activities, municipal fi nancing and other seasonal businesses—frequently qualify. Banks can use their seasonal credit line either as a primary seasonal funding source or as backstop credit. Once estab- lished, credit may be drawn down incrementally as needed, and partial and full prepayments are allowed without penalty. There is no expense involved in setting up or maintaining the seasonal line; however, all Federal Reserve loans must be secured to the Fed’s satisfaction, and a fl ex- ible, market-based rate is applied to all outstanding loans. To learn more, call the St. Louis Fed’s Credit offi ce at 1-866-666-8316 or send an e-mail to creditoffi ce@stls.frb. org. For an application and a brochure, visit our web site, www.stlouisfed.org/banking/ credit/credit.html. ■ www.stlouisfed.org 4 newmoney/.
image-container-4 F rom the time he became chair- man of the Federal Reserve in 1987, Alan Greenspan steadfastly held to the view that low and stable inflation is a prerequisite for maxi- mum sustainable economic growth. Greenspan’s focus on low and stable inflation helped keep interest rates low by reducing the inflation expectations and inflation uncer- tainty components of nominal rates. A commitment to price stability protects bankers (and others who borrowed short and lend long) who are hurt by unanticipated inflation. Greenspan reiterated his belief in low and stable inflation many times during his nearly two decades as Fed chairman. In his first congressional testimony, in February 1988, Green- span stated that “the strategy for monetary policy needs to be centered on making further progress toward and ultimately reaching stable prices,” which he defined as, “a situation in which households and businesses in making their saving and investment decisions can safely ignore the pos- sibility of sustained, generalized price increases or decreases.” 1 In February 1989, Greenspan explicitly noted that the Fed’s ultimate objective is “maximum sustainable economic growth over time” and that “the primary role of monetary policy in the pursuit of this goal is to foster price stability.” 2 When asked at the July 1996 FOMC meeting about the level of inflation that no longer alters decision-mak- ing, Greenspan responded, “I would say the number is zero, if inflation is properly measured.” 3 In so doing, he confirmed that the rate of inflation that results in maximum sustainable growth rate of output is zero. Robert Rasche (right) is the director of Research and Daniel Thornton is vice president of Research at the Federal Reserve Bank of St. Louis. Greenspan’s Unconventional View of the Long-Run Inflation/Output Tradeoff By Robert H. Rasche and Daniel L. Thornton Greenspan’s view of a long-run negative relationship between inflation and output growth is unconventional. Starting with the Phillips curve in the late 1950s, economists came to believe that lower rates of inflation could be obtained only by reducing output. In the late 1960s Milton Friedman and Edmond Phelps demonstrated that, if economic agents are rational, the tradeoff could not be maintained indefinitely, i.e., the steady-state level of output is independent of the rate of inflation, so that the long-run Phillips curve is vertical. Most economists believe that, beyond some rate, inflation does reduce output. However, many believe that moderate inflation has no effect on economic growth, and some believe that moderate is good for growth. One implication of Greenspan’s view is that, should policy- makers decide to adopt a specific numerical inflation target, the target inflation rate should be zero, appropriately mea- sured. A second implication is that the idea that policymakers should tolerate some moderate inflation rather than to bear the economic costs of reducing the inflation rate to zero is signifi- cantly weakened, if not eliminated, if zero is the inflation rate consistent with maximizing economic growth. 4 The Greenspan principle—maximum sustainable economic growth is achieved at zero inflation—is not yet reflected in modern monetary policy analyses. Nearly all theoretical analyses incorporate some variant of an “expectations- augmented Phillips curve,” where inflation is influenced by the gap between actual and potential output in the short run. Most of these models assume the economy’s long-run growth rate is driven by exogenous factors (e.g., technology and the growth rate of the labor force) that are independent of mon- etary policy. Therefore, the Greenspan principle is not reflected in conventional models. Given Greenspan’s success over the past two decades, it would seem desirable that conventional models be modified to allow for the unconventional Green- span principle. One possibility is to incorporate Greenspan’s observation that “as the inflation rate falls, it becomes increas- ingly difficult for producers to raise prices. They, therefore, tend to try to reduce costs in order to maintain margins.” 5 ■ ENDNOTES: 1 Testimony before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, Feb. 13, 1988. 2 Testimony before the Committee on Banking, Finance and Urban Affairs, U.S. Senate, Feb. 21, 1989. 3 Transcript of the FOMC meeting held on July 2-3, 1996, p. 51. 4 See Daniel L. Thornton, “The Costs and Benefits of Price Stability: An Assessment of Howitt’s Rule,” Federal Reserve Bank of St. Louis Review, March/April 1995, 78(2), pp. 23-38. 5 Transcript of the FOMC meeting held on July 2-3, 1996, p. 46. www.stlouisfed.org 5
image-container-5 FedFacts New State Quarters Scheduled for 2006 Release The state commemorative quarter program, which started in 1999 and continues through 2008, will introduce five new designs in 2006. The commemorative quarters are being released in the order of each state’s entry into the Union: Nevada, Nebraska, Colorado, North Dakota and South Dakota. The Nevada quarter starts circu- lating March 13. More information is available at www.usmint.gov/mint_programs/. U.S. Mint Issuing “Return to Monticello” Nickel The U.S. Mint in 2006 will release a nickel featuring Thomas Jefferson’s visage modeled after a portrait painted in 1800 when he was elected president. The reverse will feature the familiar scene of Jefferson’s Virginia home, Monticello, but crisper and cleaner than the image has been in recent years. The front will also include the cursive “Lib- erty” inscription that debuted on the 2005 nickels, which is again presented in Jefferson’s own handwriting. The 2006 nickel is part of the Mint’s West- ward Journey Nickel Series. Last year’s designs included the return of the buffalo nickel. See the designs at www.usmint.gov/mint_programs/. ■ P.O. Box 442 St. Louis, Mo. 63166-0442 Editor Scott Kelly (314) 444-8593 scott.b.kelly@stls.frb.org Central Banker is published quarterly by the Public Affairs department of the Federal Reserve Bank of St. Louis. Views expressed are not necessarily official opinions of the Federal Reserve System or the Federal Reserve Bank of St. Louis. Greatness: Making It Happen MEMPHIS—MARCH 7 Leadership Memphis and the Federal Reserve Bank of St. Louis invite bankers to a Breakfast with Paul Grogan, author of Comeback Cities: A Blueprint for Urban Neighborhood Revival and founder of CEOs for Cities. For information, call Leadership Memphis at (901) 278-0016. Local Laws, Predatory Lending and Credit Flow ST. LOUIS—MARCH 16 Starting with North Carolina in 1999, states and local governments have enacted laws to curb predatory lending in the subprime mortgage market. A new report from the Fed- eral Reserve Bank of St. Louis takes a look at these laws and how they affect the flow of credit in the subprime mortgage market. The author will present his findings at this meeting and a panel of experts will lead a dis- cussion on the topic. For information, call Cynthia Davis in Community Affairs at (314) 444-8761 or 1-800-333-0810, ext. 44-8761. ■ CalendarEvents UPCOMING FED-SPONSORED EVENTS FOR EIGHTH DISTRICT DEPOSITORY INSTITUTIONS The federal bank and thrift regulatory agencies are requesting comment on pro- posed guidance on sound risk management practices for concentrations in commercial real estate lending. The proposed guidance reinforces existing guidelines for real estate lending and safety and soundness and provides criteria for identifying institutions with commercial real estate loan concentrations that may warrant greater supervisory scrutiny. Comments are due by March 14, 2006. Direct all comments to: Jennifer Johnson, Secretary, Board of Governors of the Federal Reserve System, 20 th St. and Constitution Ave., N.W., Washington, D.C. 20551, or go to www.federalreserve.gov/generalinfo/foia/ ProposedRegs.cfm. For more information about this pro- posal, visit www.federalreserve.gov/ boarddocs/press/bcreg/2006/20060110/ default.htm. ■ Out Comment The following is a Federal Reserve System proposal currently out for comment: FIRST-CLASS US POSTAGE PAID PERMIT NO 444 ST LOUIS, MO for
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Date: April 2006
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  • Authors: Rasche, Robert H., Thornton, Daniel L.
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