mr. kelley's testimony to the us house of representatives committee on banking and financial services testimony by mr. edward w. kelley jr., a member of the board of governors of the us federal reserve system, before the committee on banking and financial services of the us house of representatives, in washington dc, on 4 / 11 / 97. i am pleased to appear before the committee today to discuss the federal reserve ’ s efforts to address the year 2000 computer systems issue. the federal reserve system has developed and is executing a comprehensive plan to ensure its own year 2000 readiness and the bank supervision function is well along in a cooperative, interagency effort, to promote timely remediation and testing by the banking industry. this afternoon i will focus on actions being taken by the federal reserve system to address our internal systems, coordination with the industry, and contingency planning. background the federal reserve operates several payments applications that process and settle payments and securities transactions between depository institutions in the united states. three of these applications are the fedwire funds transfer, fedwire securities transfer, and automated clearing house ( ach ) applications. the first two applications are large - value payments mechanisms for u. s. dollar interbank funds transfers and u. s. government securities transfers. users of the applications are primarily depository institutions and government agencies. the fedwire funds transfer system is a real - time credit transfer system used primarily for payments related to interbank funds transfers such as fed funds transactions, interbank settlement transactions, and “ third - party ” payments between the customers of depository institutions. funds transferred over fedwire are immediately final ; they cannot be revoked after they have been accepted and processed by the federal reserve. about 10, 000 depository institutions use the fedwire funds transfer system to transfer each year approximately 86 million payments valued at over $ 280 trillion. the current average total daily value of fedwire funds transfers is approximately $ 1. 1 trillion. the fedwire securities transfer system supports the safekeeping, clearing, and settlement of u. s. government securities in both the primary and secondary markets. it provides custody of u. s. government securities in book - entry form, as well as the transfer of securities ownership among market participants. on the custody side, the system calculates and credits interest and principal payments to the holders of securities, reconciles outstanding securities balances with issuers, and performs other record keeping and collateral safekeeping functions. on the transfer side, the system delivers book

? the measures of inflation that receive the most attention in the united states attempt to measure the prices of goods and services consumed by households. for housing, this means measuring the price of consuming the shelter and other services provided by a home. the price of shelter is most easily measured by rents. of course, rent cannot be observed for owner - occupied homes. for these homes, the price of shelter is estimated as the rent that owners would pay based on rents of nearby rental units. the purchase price of a home is not incorporated into these measures of inflation because it reflects the cost to invest in a real estate asset, not the price to consume the shelter that housing provides. as i mentioned earlier, rent growth has been very high recently. the housing services component of the pce price index rose a bit above 0. 7 percent in august, which was slightly above the previous three - month average. and i expect a similar pace to continue for a while, well into next year. why? shelter inflation measures the rents actually paid by households. only a fraction of households sign a new lease in a given month or renew their lease each month. so, when monthly shelter inflation is calculated, it includes a large share of homes under lease where rents did not change. as a result, changes in market conditions show up in the inflation statistics only over a period of several months. in addition, the inflation statistics use a six - month average when calculating rent growth. asking rents and rents on new lease contracts - which do reflect contemporaneous rental market conditions - have been rising at a fast pace for more than a year. these increases have fueled shelter inflation so far this year, and they should continue to do so for at least the next six months. that said, there is a glimmer of hope in the most recent readings of asking rents, where the rate of increase has stepped down a bit. this slower pace should eventually contribute to a slowdown in shelter inflation, although that might not be seen until later next year. so now let's consider the implications of this picture of the current and future housing market for overall inflation and monetary policy. if we assume that the recent rate of inflation in the cost of shelter continues, how much would prices of goods and other services need to moderate in order to lower overall inflation meaningfully - say, to 3 percent? when talking about future inflation, it is most helpful to focus on measures of core inflation. so if the price index for housing services