beneficiaries of the unprecedented generation of stock market wealth have been those with the skills and the work style to work in high - tech companies, who are rewarded with stock, and those with the courage to invest in high - tech sectors. this observation leads to several questions. first, how skewed is the distribution of gains from the stock market? if gains are indeed skewed, what then is the actual dynamic of the wealth effect? when does an unequal participation in equities become sufficiently broad - based to influence the path of our economy? i think of these questions as providing the microeconomic underpinnings to our macroeconomic performance. finally, we have seen a run - up in margin debt, particularly during the last two months of 1999 and the first month of 2000. i believe that the federal reserve should not foster the impression that we are targeting the equity market by adjusting our one tool in the margin area, namely initial margin requirements. however, given our obvious interest in macro - stability, it is useful to understand more fully what has motivated this recent run - up in margin. some argue that it reflects a desire on the part of investors to capture some capital gains, while others are quick to point out that, as a percentage of market valuation, margin has not increased dramatically. according to another theory, margin borrowing is the realm of the small investor whereas large investors finance equity purchases through other means. in any event, prudent margin procedures are an important part of sound business practice. i expect that those extending margin credit, especially the major clearing firms, as well as investors, and the public at large, would continue to recognize that conservative margin practices are in their own interest. observations and open issues : international markets let me turn now to the role of international developments in policy. our mandate gives priority to price stability and maximum sustainable employment, which i think are the right elements for us to consider in policy deliberations. therefore, i believe that international economic considerations, like stock market valuations, should receive only the focus merited because of their implications for the us economy. certainly, developments in the international sector, in particular a large and growing current account deficit, might indicate that there are imbalances in the economy of the united states. similarly, movements in the exchange value of the us dollar might transmit pressures on inflation, but they also are an important transmission mechanism for monetary policy. however, managing the external balance and the exchange value of the

investment capital, and valuations in the stock market are one determinant of the cost of capital for businesses. therefore, equity prices affect business fixed investment, a major driver of our economy. given the economic importance of equity prices, it is reasonable for policymakers to monitor developments in this market even if we do not “ target ” specific values. we have seen in other economies that the bursting of bubbles in financial markets can create unsettled conditions that affect real economic activity. therefore, the maintenance of sound equity market conditions is of concern to policymakers, though how that can be accomplished is often far from clear. my questions about equity markets center on the issue of valuation and the wealth effect. economists propose numerous approaches to determining the “ correct ” level of equity prices. one such approach compares equity market valuations ( namely earnings - price ratios ) to the return on fixed - income securities, generally the 10 - year us treasury bond. but many observers have suggested that this measure of the “ correct ” stock market valuation may no longer be accurate. some suggest that the nature of equity markets has changed with the introduction of new instruments that allow for the better management or sharing of risks. therefore, these observers assert that lower premiums over risk - free returns are appropriate and that old relationships between earnings - price ratios and the return on treasury instruments no longer hold. others argue that, in this world of knowledge - intensive industries, accounting treatments do not accurately measure true economic earnings, and therefore measures of “ correct ” stock valuations do not capture economic reality that market participants see. these assertions are interesting, but they need further investigation. in addition, with respect to proper valuations, we know that many businesses are using options as a form of compensation to employees and that the value of these options is not being recorded as compensation at the time they are granted. we roughly estimate that accounting for the value of options granted would have reduced reported income for s & p 1, 500 firms nearly 10 % in 1998. the same adjustment would have reduced the growth rate of reported income for s & p 1, 500 firms almost 2½ percentage points per year, on average, during the 1996 - 98 period. when looked at with these refinements, the current earnings - price ratios appear even more out of alignment with historical experience. when one considers the performance of the stock market during the recent past, it is clear that the gains are not evenly distributed, even among stock market investors. some of the greatest