was gathering momentum. in the latter half of last year, the growth of output per hour slowed, giving a boost to unit labor costs after two years of declines. those increases were not large, however, and productivity growth seems to have increased at a good clip in the first quarter of this year. a limited slowdown in productivity growth would not be a major concern. the margin of prices over unit labor costs is high by historical standards, and firms should be able to absorb some increases in labor costs without passing them on in prices. not that firms would do so voluntarily, of course, but they could be forced to by a competitive economic environment characterized by good profit opportunities. however, a more substantial and permanent slowdown in productivity growth would put continuing upward pressure on costs that firms eventually would need to recover by raising prices more quickly. to some extent, though, the monetary policy response to slower productivity growth also depends on whether or not these changes take businesses and workers by surprise. if they do, demand might also be reduced as capital investment looked less profitable and as households cut back on consumption to match their lower expected earnings over time. unfortunately, we cannot directly observe some of these critical determinants of inflation - slack in the economy, the intentions of people not in the labor force, or structural productivity growth. we infer them indirectly by analyzing information on costs, prices, compensation, profit margins, and levels of capital and labor utilization compared with history. when the economy is in the early stages of an expansion, these inferences are relatively easy, and we can be confident that aberrations from expectations will soon reverse. that is not where we are now. the unemployment rate is close to what some economists believe to be its lowest sustainable level ; capacity utilization in manufacturing is moving closer to its long - term average level ; and unit labor costs have begun to creep higher. at this time, the odds are that inflation pressures are contained and will remain so. the behavior of labor compensation, the height of profit margins, and still - strong productivity growth all suggest that workers and businesses continue to face very competitive market conditions and that cost increases will remain in check. but in the current circumstances, we need to be vigilant for signs of persistent upward pressure on costs, a marked tightening of labor and product markets, a reduction in global discipline on domestic pricing decisions, or increases in inflation expectations - especially expectations of price increases over the longer run. over time, of course, it is monetary policy

those areas of consumer compliance where problems are uncommon, although we are ready to ramp up that scrutiny if we have concerns about practices at a particular institution. since making these changes 16 months ago, the average length of time for examinations has dropped, and the feedback we have heard from you is mostly positive. bankers have told us that the examiners seem to have a better grasp of the key issues and that exams are, as we intended, more closely tailored to the business characteristics and risk profile of individual institutions. examiners also tell us they sometimes see increased consumer compliance risk at community banks that are expanding beyond their traditional product offerings, often using outside vendors to introduce new products such as prepaid cards or credit card add - ons. these products are often complex, and community banks may not always be familiar with the risks the products pose. banks may not have sufficient expertise to thoroughly check out a vendor and monitor its performance. beyond consumer compliance supervision, the federal reserve has expanded our ability to conduct more of the work of bank examinations off site. if banks have electronic loan records, it is possible for examiners to assess loan quality and underwriting practices remotely, spending much less time on site. this approach has the potential to improve examination efficiency and to reduce the examination - related disruption to banking more on the large institution supervision coordination committee is available on the board ’ s website at www. federalreserve. gov / bankinforeg / large - institution - supervision. htm. bis central bankers ’ speeches operations. however, if banks prefer more face - to - face interaction with examiners – and there are banks that do – we will continue the traditional on - site review. our efforts to further tailor bank supervision at community banks continue. staff members from the federal reserve, office of the comptroller of the currency, and federal deposit insurance corporation are working through a major review of regulations called for in the economic growth and regulatory paperwork reduction act ( egrpra ). we are still in the midst of this effort, which is being conducted with a broad mandate to identify and revise where possible outdated, unnecessary, or unduly burdensome regulations, including those that apply to community banks. the agencies are carefully considering public comments. although some burden - reducing measures may require congressional action, the agencies will act to implement regulatory relief when possible before the end of the egrpra review period. the results of our egrpra review will be included in the agencies ’ joint