mr. kelley discusses the year 2000 issue testimony of mr. edward w. kelley, jr., a member of the board of governors of the us federal reserve system, before the committee on commerce, science, and transportation at the us senate on 28 / 4 / 98. i am pleased to appear before the committee today to discuss the year 2000 computer systems issue and the federal reserve ’ s efforts to address it. the stakes are enormous, nothing less than the preservation of a safe and sound financial system that can continue to operate in an orderly manner when the clock rolls over at midnight on new year ’ s eve and the millennium arrives. so much has been written about the difficulties ascribed to the year 2000 challenge that by now almost everyone is familiar with the basic issue - specifically, that information generated by computers may be inaccurate or that programs may be terminated because they cannot process year 2000 dates. 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 morning i shall first focus on the potential macroeconomic consequences of the year 2000 issue. then i shall discuss actions being taken by the federal reserve system to address its internal systems, including reserve bank testing with depository institutions, and its bank supervision efforts. the macroeconomic effects of the millennium bug the year 2000 ( “ y2k ” ) problem will touch much more than just our financial system and could temporarily have adverse effects on the performance of the overall us economy as well as the economies of many, or all, other nations if it is not corrected. the spectrum of possible outcomes is broad, for the truth of the matter is that this episode is unique. we have no previous experiences to give us adequate guideposts. a few economists already are suggesting that y2k - related disruptions will induce a deep recession in the year 2000. that is probably a stretch, but i do not think that we shall escape unaffected. some of the more frightening scenarios are not without a certain plausibility, if this challenge were being ignored. but it is not being ignored. while it is probable that preparations may in some instances prove to be inadequate or ineffective, an enormous amount of work is being done in anticipation of the rollover of the millennium. it is impossible today to forecast the impact of this event, and the range of possibilities runs from minimal to extremely

the upside or on the downside : 2 percent is our goal. second, the framework statement discusses the challenges in providing a similar fixed goal for employment. it quite rightly emphasizes that monetary policy is not a prime determinant of maximum employment, even in the long run. the committee ’ s policy stance is based on an bis central bankers ’ speeches ever - evolving assessment of the maximum level of employment in both the medium and the long term. my own assessment of the long - run unemployment rate, consistent with 2 percent inflation, is currently 5 percent – and that assessment has fallen greatly over the past 18 months. finally, the framework statement describes how the committee weighs the two mandates – promoting maximum employment and promoting price stability – against one another. importantly, it stresses that, from the point of view of monetary policy, the two mandates are typically complementary. as i noted earlier, monetary policy pushes employment and inflation in the same direction. but, as it turns out, most shocks that push employment down also tend to push inflation down over the medium run. hence, monetary stimulus designed to raise employment will also help the fomc pursue its inflation objective. indeed, the past few years provide a clear example of the complementarity of the fomc ’ s two mandates. in terms of the employment mandate, labor market outcomes have been distressingly weak. we can see this weak performance in a number of ways, but i ’ ll use two particular metrics : the unemployment rate and the employment - population ratio. the unemployment rate rose rapidly beginning in 2007, peaked at 10 percent in late 2009 and has fallen only gradually to its current level of 5. 9 percent. the second graph depicts the fraction of people over the age of 16 who have a job. that fraction fell sharply beginning in 2007 and has since risen only slightly. bis central bankers ’ speeches to be clear, some of this slow recovery in employment can be attributed to a key demographic force : an increasing fraction of the people aged 16 and over reach retirement age every year. but the recovery in employment is a highly subdued one, even if we strip out this demographic effect by focusing only on those people aged 25 to 54. so, employment has been below its maximum level over the past seven years. what about inflation? the following graph shows that pce inflation has averaged 1. 5 percent since the beginning of the great recession in 2007. so, inflation has also been low relative to the fomc ’ s target. and