mr ferguson remarks on the international millennium challenge remarks by mr roger w ferguson, jr, a member of the board of governors of the us federal reserve system and chairman of the joint year 2000 council, at the bank administration institute, orlando, florida on 21 / 1 / 99. thank you for your invitation to speak today on the timely and critical topic of the year 2000 challenge. this meeting reinforces the internationally recognized leadership role of the financial services industry in promoting year 2000 preparedness. this morning i would like to discuss the global challenge presented by the year 2000 problem and describe international efforts, particularly those of the joint year 2000 council, to assist the worldwide financial services industry to be ready for the century date change. of course, the obligation to fix the year 2000 problem belongs ultimately to you in the private sector. therefore, i will also discuss the important role the financial services industry can play to further mitigate risk, to develop sound contingency plans, and to serve as a catalyst in promoting best practices among your suppliers and customers. global challenge the impact of the year 2000 date change on computer systems in the financial services industry presents a significant global challenge. the risks of some disruption to international trade and financial markets are not to be discounted completely, and the consequences of inaction are grave. the world economy functions through its financial services markets, and it is not a surprise, therefore, that the year 2000 preparedness of the financial services industry is of great interest. widespread and long - lasting disruptions, should they occur, could seriously impair commercial activities in countries where economies are already weakened. moreover, and possibly the most onerous consequence, if market participants were to lose confidence, many countries, including the united states, may be faced with unusual liquidity demands. the good news is that we are not faced with inaction. i find that the seriousness of the year 2000 problem is gaining increased national and international attention. still, with less than a year left before the millennium change, it remains difficult to judge its global impact. given the sheer number of computers and chip - based systems, and the manual nature of the fixes that have emerged to date, we are likely to experience some degree of disruption, which i believe most likely will prove to be mild and short - lived. i do not think that we will face global recession. ultimately i believe the number and extent of computer system disruptions will not be used as the measure of our success in addressing the year 2000 problem. instead

i would note the possibility of a feedback loop between financial market disruptions and deterioration in the real economy that i have emphasized in previous speeches ( mishkin, 2008a, 2008b ). because economic downturns typically result in even greater uncertainty about asset values, such episodes may trigger an adverse feedback loop whereby financial disruptions cause investment and consumer spending to decline, which, in turn, causes economic activity to contract. such a contraction then increases uncertainty about the value of assets, and, as a result, the financial disruption worsens. this development then causes economic activity to contract further in a perverse cycle. inflation and inflation dynamics let me turn now to inflation and inflation dynamics. over the twelve months ended in january, the price index for total personal consumption expenditures ( pce ) rose 3. 7 percent, up from 2. 1 percent during the comparable period twelve months earlier. recently, headline inflation has been pushed higher by sizable increases in food and energy prices ; crude oil prices have surged, and food prices have risen significantly, reflecting strong global demand in general as well as hefty demand in particular for corn for use in ethanol production. even excluding food and energy, recent readings on inflation also have been elevated, although over the past year core pce prices decelerated a touch from 2. 4 percent to 2. 2 percent. the recent observations on core inflation suggest that higher energy costs and the lower exchange value of the dollar may have been sources of upward pressure on core inflation. however, the recent bump up in inflation also likely reflected a reversal of unusually low readings earlier last year for apparel, prescription drugs, and so - called nonmarket items in the index, and the contribution of these items to core inflation is likely to wane. in my view, long - run inflation dynamics are influenced importantly both by prospects for the future balance of aggregate supply and demand, as well as by longer - run inflation expectations ( mishkin, 2007a ). by a range of measures, longer - run inflation expectations appear to have remained reasonably well contained even as recent readings on headline inflation have been elevated. the median expectation of inflation five to ten years ahead in the reuters / university of michigan survey stands in the middle of the range that has been evident over the past couple of years, although the expectation for year - ahead inflation from this same survey has moved up recently, presumably in response to the higher rates of actual inflation. in addition, although the measure of long - run expectations