mark w olson : the importance of market structure remarks by mr mark w olson, member of the board of governors of the us federal reserve system, before the annual conference of the central bank of chile santiago, chile, 13 december 2002. * * * it is a great pleasure for me to participate in this interesting and thought - provoking conference, and i wish to begin by thanking carlos massad and the central bank of chile for inviting me to attend. my remarks today will address, from my perspective as a policymaker, a former banker, and a former adviser to the congress, some of the issues that were raised in this morning's session and that will be discussed in this afternoon's presentations. specifically, i would like to comment on some of the potential implications of the u. s. banking sector's changing structure for competition in the context of the board's supervision and antitrust responsibilities. i will also discuss the deposit insurance system, which is administered through the federal deposit insurance corporation ( fdic ) and the allocation of credit, with a focus on loans to small businesses. as everyone here is fully aware, changes in market structure can have profound effects in each of these areas. by changes in market structure, i will refer primarily to changes in the number, size, charter, and other characteristics of firms on the supply side of banking and nonbanking markets brought about by the ongoing consolidation of the banking and financial services industry. however, the demand side of markets is also clearly relevant, and when necessary, i will include demand characteristics in my discussion. the issues to which i refer are not new nor unique to the united states but, rather, have existed for many years and transcend national boundaries. in fact, the consolidation of banks and other types of financial institutions is one of the most notable features of the international financial landscape over the past decade or more. in recognition of the importance of financial consolidation, its potential impact on market structure, and its potential implications for public policy concerns, the finance ministers and central bank governors of the g - 10 nations in late 1999 asked their deputies to study financial consolidation and its potential effects. my colleague, roger ferguson, directed this study, which was published in early 2001. today, i would like to use some of the findings of the study as my starting point for addressing the issues i mentioned a few moments ago. because the study was international in scope it will allow me to put some of my comments on the united states into a

might have operated earlier, but i believe that the difference would be stark. all told, increases in energy prices over the past couple of years probably added about 1 / 2 percentage point to core inflation in 2005, and the lagged pass - through of past increases in energy prices appears likely to add roughly the same amount this year, provided that energy prices do not rise significantly further. the term structure of interest rates another development that has received considerable attention recently is the term structure of interest rates - - the yield curve. typically, longer - term interest rates are higher than short - term rates, so a curve plotting yields would rise as maturity lengthens. however, since late last fall, yields on longer maturities have been equal to or less than those at some shorter maturities, creating a flat to inverted yield curve. going back to the 1950s, a simple picture suggests that the yield curve tends to invert before recessions. in addition, some academic research, along with recent market commentary, suggests that the shape of the yield curve is a strong predictor of future economic growth. however, the treasury yield curve is now only slightly inverted between one and five years and is roughly flat beyond that. moreover, yield curves can be flat or inverted either because short - term interest yields are relatively high or because long - term rates are relatively low. historically, flat or inverted yield curves owing to unusually high short - term rates have tended to be followed by slowdowns, but that has not been the case for those episodes of inverted yield curves owing to relatively low long - term rates. and, in the current situation, the flatness of the term structure results largely from relatively low long - term yields. in addition, the relationship between the yield curve and future economic growth may have weakened in recent decades because the decline in inflation, the dropoff in the variance of economic growth since the mid - 1980s, and financial innovation may have altered the sensitivity of households and businesses to changes in rates. indeed, in simple regression models estimated with recent data, a change in the slope of the term structure has a smaller effect on economic growth than when the models are estimated with data taken from a longer sample period. and models using the more recent data anticipate more rapid real gdp growth in coming quarters than do models using the longer sample period. the relationship between the yield curve and future growth also appears to depend on the factors that are keeping long - term rates low. long - term interest rates embody both