private nonfarm employment fell 66, 000, compared with increases averaging around 175, 000 per month over the preceding twelve months. the shortfall of roughly 240, 000 jobs from the earlier trend is a crude measure of the direct disruption effects of the hurricane. more important, the apparent absence of significant indirect effects in other areas of the united states is an indication that the underlying gains in employment and income were well maintained outside the gulf region. an important question for policymakers is how inflation and economic activity will respond in coming months. one concern is that the rise in energy prices, as well as the downshift in consumer confidence seen in recent readings, may hold back aggregate demand at least for a time. however, the rebuilding itself should provide some impetus to demand in coming quarters. at the same time, of course, higher prices for energy items, including gasoline, heating oil, and natural gas, will be adding to top - line inflation in the near term. as well, these price increases will put upward pressure on the costs of the producers of other items, thereby posing the risk of some impetus to core inflation. whether these pressures are, in fact, passed through to core inflation will depend on a host of considerations, including the willingness of producers to absorb those cost increases and experience, at least for a time, lower profit margins. needless to say, developments in this area will be the subject of intense scrutiny on my part in coming months. a vital contributor to the rebuilding and recovery effort will be the various actions of the federal government. the magnitude of the devastation called for a significant response from the federal government, and the congress and the president acted quickly to provide emergency spending and tax breaks to aid the areas affected by the hurricanes. whether these emergency fiscal measures will ultimately be financed by increased federal borrowing, or by finding offsetting spending decreases or revenue increases, is still an unsettled issue in the congress. to a certain extent, temporary emergency federal borrowing may be viewed as appropriate, as the costs would ultimately be spread out across all u. s. taxpayers over time. nonetheless, given the current size of the federal deficit, additional federal borrowing raises issues because of the potential negative effects that higher deficits can have on the economy. 2 / 5 although expected outlays and tax breaks for hurricane disaster relief raise concerns about future deficits, budget developments over the past year had turned positive before the hurricanes for the first time in a while. for the 2005 fiscal year that just

whether a trading mentality has migrated to other parts of large financial firms, so that the position communicated by management to both employees and others is that the firm has no “ customers ” or “ clients, ” only counterparties. while such an attitude is typical for trading in anonymous markets or with equally sophisticated institutions, it hardly seems designed to engender trust on the part of those who have ongoing relationships with the firm. this tendency may pose another challenge in managing complex banking organizations – the need to foster different kinds of norms and expectations across the different parts of the firm, which may do business with individuals and institutions of widely varying financial expertise. to encourage behavior among their employees that reflects something other than a narrow mentality of compliance and constraint, firms need to take tangible steps that reinforce stated norms such as respect for customers. some interesting possibilities along these lines are suggested in a recent book by thomas huertas, a former u. k. banking regulator. 2 although huertas focuses directly on how banks can avoid suffering losses from conduct and operational risks, his proposals would also serve the purpose just noted. one idea is that firms develop a score for conduct risk. while analogous to long - established scoring systems thomas huertas ( 2014 ), safe to fail ( london : palgrave macmillan ), pp. 158 – 59. bis central bankers ’ speeches for credit risk, this method would, in his words, “ include ranking the business or product against factors that frequently give rise to conduct issues, including without limitation the sophistication of the customer, the complexity of the product, the level of training of the staff, and so on. ” a second, complementary idea is for the firm to have a formal system in place to, again in huertas ’ words, “ monitor adherence to the original product approval criteria, especially where the product is growing rapidly and / or is generating extraordinary profits. ” these particular ideas may or may not be best for specific firms. the point, though, is that some concrete organizational systems are needed for firms to carry into effective action the goals or values that they nominally espouse. before leaving this topic, i want to observe that regulators can unwittingly reinforce what i have termed a mere compliance mentality. i would first note that the detail of many regulations means that attention to narrow issues of compliance is sometimes wholly understandable and, indeed, essential. banks, like other regulated entities, need to be able to determine how a regulation actually