. at the time of corrigan's essay - - the early 1980s - - the statutory authority for that separation was largely contained in two laws : the glasssteagall act, which separated commercial banking from certain investment and securities activities, and the bank holding company act ( with amendments ), which narrowly limited the activities of corporations that were allowed to own banks. when it passed in 1956, the bank holding company act was thought to have been in response to one company's aggressive expansion into banking activities. that company, transamerica insurance, had expanded into several western states and concerns were raised about the resulting concentration of financial resources. therefore, the ensuing body of law on the commerce and banking issue concentrated significantly on separating, or was inspired by desire to separate, banking from securities or banking from insurance. from the time of corrigan's essay until passage of gramm - leach - bliley, the banking industry had expanded substantially into both the securities and insurance agency fields, though significant restrictions still remained. much of the industry's expanded securities authority was gained through the federal reserve's approval of securities underwriting for banks, under section 20 of the glass - steagall act. under the federal reserve's rule, a bank subsidiary was " not engaged principally " in securities underwriting if at first 5 percent, then 10 percent, and ultimately 25 percent of its revenue came from underwriting. this expanded authority allowed many banking organizations, though almost exclusively large banks, to significantly expand their domestic securities activities. these same powers were extended to foreign banks operating in the united states. in insurance, gains for the banking industry were largely the result of court determinations that annuities could be underwritten and sold by banks. court determinations also expanded national banks'ability to market insurance products. consequently, banks of all sizes have expanded their involvement in insurance and annuity activities. by 1999, banks and bank holding companies had gained significant additional product authority in securities and insurance, areas that had been perceived to be on the other side of the banking and commerce wall at the time corrigan wrote his essay. a number of factors persuaded congress that federal action was appropriate, and the gramm - leach - bliley act was passed. congress had learned from the securities and insurance experiences of foreign banks, both the high points and the low points. on the one hand, institutions in some european countries had successfully broadened their securities and insurance activities. on the other hand, there were

less rapidly. firms had built inventories at a rapid clip in 2004 and the first part of this year, and by late winter many businesses seemed to have been more satisfied with their inventory positions. consequently, they scaled back rebuilding efforts and trimmed the growth of production accordingly. still, activity rose rapidly enough to further erode margins of economic slack. the unemployment rate fell from 5. 4 percent at the end of last year to 4. 9 percent in august, and the rate of capacity utilization continued to rise toward its long - run average, though that increase was slowed with the production adjustment in the spring. measures of labor compensation have given somewhat mixed signals about how tight labor markets have become. the rate of increase in the measure of compensation per hour derived from the national income and product accounts moved up appreciably over the four quarters ended in mid - 2005 compared with the preceding year. this rise was apparently due in part to bonuses and stock options that may be only loosely related to labor market slack, however. moreover, according to the employment cost index, which is based on a survey of firms, and to the growth in average hourly earnings in the payroll employment report, compensation pressures remained quite subdued. on balance, i do not believe conditions in labor markets have become excessively taut, but experience suggests remaining humble in making any such assessment. i would like to thank stacey tevlin, lawrence slifman, vincent reinhart, and david stockton, of the board's staff, for valuable comments. 1 / 4 measures of core consumer inflation eased some over the late spring and early summer, even as headline inflation was pushed higher by rising energy prices. in addition to the favorable news on core inflation, observations from the financial markets showed that forward measures of inflation compensation beyond the next few years - - the difference between distant forward rates on nominal and indexed debt - - moved down over the spring, despite the rising energy prices. even so, core inflation had moved higher in 2004, interest rates were still low, and the economy seemed to be expanding at a pace that over time could threaten to impart added upward pressure on inflation. as a consequence, the fomc indicated in its august announcement that its intention, in the absence of unexpected developments, was to continue to remove monetary policy accommodation at a measured pace. hurricanes are obviously the very embodiments of unexpected developments. among other effects of hurricanes katrina and rita, they have materially increased uncertainty about the economic outlook. the questions