now running below increases in hourly compensation. the available information suggests that hourly compensation has been increasing at an annual rate of about 4 - 1 / 2 percent in the first half of the year. to be sure, the increases in average hourly earnings of nonsupervisory workers have been subdued in recent months and barely budged in june. but other compensation has accelerated this year, reflecting continued sizable increases in health insurance costs, a sharp increase in business contributions to pension funds, and an apparently more robust rate of growth of hourly earnings of supervisory workers. the larger wage gains for supervisory workers together with anecdotal reports of growing skill shortages are consistent with earlier evidence of rising wage premiums for skilled workers relative to less - skilled workers. for the moment, the modest upward path of unit labor costs does not appear to threaten longer - term price stability, especially if current exceptionally high profit margins begin to come under more intense competitive pressures at home and from abroad. although some signs of protectionist sentiment have emerged, there is little evidence that the price - containing forces of ever - widening global competition have ebbed. in addition, the economy is not yet operating at its productive capacity, which should help to contain cost pressures. but we cannot be certain that this benign environment will persist and that there are not more deep - seated forces emerging as a consequence of prolonged monetary accommodation. accordingly, in assessing the appropriateness of the stance of policy, the federal reserve will pay close attention to incoming data, especially on costs and prices. what does seem clear is that the concerns about the remote possibility of deflation that had been critical in the deliberations of the federal open market committee ( fomc ) last year can now be safely set aside. those deflationary pressures were largely a consequence of the stock market slump, the capital goods contraction that commenced in 2000, and, as i noted earlier, the extreme business caution that followed from these events as well as from terrorist attacks, corporate scandals, and the lead - up to the war in iraq. both equity prices and capital goods spending have turned up over the past year, and the probability that economic activity might stagnate has receded. as always, considerable uncertainties remain about the pace of the expansion and the path of inflation. some of those uncertainties, especially ones associated with potential terrorism both here and abroad, are difficult to quantify. such possibilities have threatened the balance of world supply and demand in oil markets in recent months, especially as

confidence, the new york clearinghouse, a private consortium of banks, reviewed the books of the banks under pressure, declared them solvent, and offered conditional support – one of the conditions being that heinze and his board step down. these steps were largely successful in stopping runs on the new york banks. but even as the banks stabilized, concerns intensified about the financial health of a number of so - called trust companies – financial institutions that were less heavily regulated than national or state banks and which were not members of the clearinghouse. as the runs on the trust companies worsened, the companies needed cash to meet the demand for withdrawals. in the absence of a central bank, new york ’ s leading financiers, led by j. p. morgan, considered providing liquidity. however, morgan and his colleagues decided that they did not have sufficient information to judge the solvency of the affected institutions, so they declined to lend. overwhelmed by a run, the knickerbocker trust company failed on october 22, undermining public confidence in the remaining trust companies. to satisfy their depositors ’ demands for cash, the trust companies began to sell or liquidate assets, including loans made to finance stock purchases. the selloff of shares and other assets, in what today we would call a fire sale, precipitated a sharp decline in the stock market and widespread disruptions in other financial markets. increasingly concerned, morgan and other financiers ( including the future governor of the federal reserve bank of new york, benjamin strong ) led a coordinated response that included the provision of liquidity through the clearinghouse and the imposition of temporary limits on depositor withdrawals, including withdrawals by correspondent banks in the interior of the country. these efforts eventually calmed the panic. by then, however, the u. s. financial system had been severely disrupted, and the economy contracted through the middle of 1908. the recent crisis echoed many aspects of the 1907 panic. like most crises, the recent episode had an identifiable trigger – in this case, the growing realization by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures. as the economy slowed and housing prices declined, diverse financial institutions, including many of the largest and most internationally active firms, suffered credit losses that were clearly large but also hard for outsiders to assess. pervasive uncertainty about the size and incidence of losses in turn led to sharp withdrawals of short