, and by early 1998 rates on fixed - rate mortgages were close to their lowest levels in twenty - five years. similarly, the rise in equity prices over much of 1997 and the first half of 1998 provided ample incentive for consumption by raising the value of household assets and improving the general sense of financial well - being of our citizens, as well as lowering the cost of capital faced by businesses. this domestically driven good news was counterbalanced by a sense of foreboding from asia. during the first half of 1998, the net export drag, due in large part to the turmoil in asia, subtracted about 2 percentage points from gdp growth. the trade deficit grew to well over $ 200 billion, again at an annual rate. for the march through july fomc meetings last year, the committee maintained a bias toward raising interest rates, but did not actually take action. the sense of the fomc was that the tightness in labor markets and general growth of demand would be likely to create upward – 2 – pressures on wage growth and eventually on the rate of inflation. however, uncertainty regarding the degree and timing of impact from the asian crises, and the fact that inflation was actually subdued, allowed us to adopt a “ wait and see ” posture. the second half of 1998 provided a very different configuration of events that, as you know, created the need for some monetary policy action. interestingly, the catalyst for this monetary policy decision was not directly asia or a slowing economy from net export drag. rather, it was the indirect impact of asia, working through a russian debt moratorium and ruble devaluation, which provided the impetus for an easing in u. s. short - term interest rates. by the end of august, financial markets in the united states had become quite unsettled, with an open and obvious flight to quality and liquidity creating a risk of undue credit tightening for private sector borrowers. as we said in october in an inter - meeting rate reduction that brought the decline in the federal funds rate target to 50 basis points, “ growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future. ” the flight to liquidity, which was evidenced in unusually wide spreads between u. s. government securities of similar risk characteristics, and the flight to quality, which showed through in unusually wide spreads between securities of differing risk characteristics, were the defining factors for much of august, september and

october. more recently, we have seen some signs of easing of financial market stresses and some unwinding of the associated flight to quality. these moves have been encouraged, in part, by policy actions of many central banks around the world, and, in part, by a stronger sense that the world ’ s major industrial countries, the g7, are beginning to address a number of the factors that have contributed to uncertainty and volatility in financial markets around the globe. outlook for 1999 at present the consensus view seems to be that growth in the second half of 1998 was probably a bit slower than the rapid pace of the first half, but that real gdp growth still averaged well above 3 percent on a fourth quarter to fourth quarter basis. the consensus is that this year ’ s real growth will abate further, perhaps to about 2 percent, which would eventually produce a “ soft landing ” of sustained growth near the economy ’ s potential and low inflation. it ’ s not hard to imagine risks to both sides of this scenario, especially with financial markets still not having fully settled down, and i can see that 1999 will require a continued high level of vigilance for policy makers. one of the factors that i find most interesting as we start this year is the likely impact of the upcoming century date change. as you may know, i am chairman of the joint year 2000 council, which is a group of financial regulators from around the world that has spent the last nine months focusing on the year 2000 computer problem. in an international context, the year 2000 is likely to have differing impacts across different regions. here in the united states, my colleague governor mike kelley has stated that we are likely to see some disruptions to economic activity because of year 2000 problems but the effects are likely to be temporary and quickly reversed. i believe businesses already are planning to manage their inventories with year 2000 considerations in mind. later this year, many firms will want to hold larger inventories of goods as insurance against year - 2000 - related supply disruptions and these are likely to run off those stocks in the first half of 2000. households concerned about the viability of some payment mechanisms could well desire to hold more cash, and both the federal reserve and depository institutions are preparing for this contingency. overseas, europe is about to convert to the euro, and we shall see tomorrow how successful their preparations have been. it is now important for senior management of major european institutions to turn their attention to preparations for the