the wealth effect has been real and significant. thus, all else equal, a flattening of stock prices would likely slow the growth of spending, and a decline in equity values, especially a severe one, could lead to a considerable weakening of consumer demand. some moderation in economic growth, however, might be required to sustain the expansion. through the end of 1998, the economy continued to grow more rapidly than can be currently accommodated on an ongoing basis, even with higher, technology - driven productivity growth. growth has continued to shrink the pool of workers willing to work but without jobs. while higher productivity has helped to keep labor cost increases in check, it cannot be expected to do so indefinitely in ever tighter labor markets. despite brisk demand and improved productivity growth, corporate profits have sagged over recent quarters. this is attributable in part to some acceleration in labor compensation, but other factors have also been pressing, especially intensified competition and lower prices facing our exporters and those industries competing with imports. in these circumstances, businesses will feel under considerable pressure to preserve profit margins should labor costs accelerate further, or should the falling prices of commodity inputs, like oil, turn around. but, to date, businesses ’ evident pricing power has been scant. either that would change and inflation could begin to mount or, if costs could not be recouped, capital outlays might well be cut back. the recent behavior of profits also underlines the unusual nature of the rebound in equity prices and the possibility that the recent performance of the equity markets will have difficulty in being sustained. the level of equity prices would appear to envision substantially greater growth of profits than has been experienced of late. moreover, the impressive capital gains of recent years would seem also to rest on a perception of relatively low risk in corporate ownership. risk aversion and uncertainty rose sharply over the late summer and fall of 1998 following the russian default in mid - august, as evidenced by widening spreads among yields on debt of differing credit qualities and liquidity. the rise in uncertainty increased the discounting of claims on future incomes, and that reduced stock market prices even as the long - term earnings growth expectations of security analysts continued to rise. as risk aversion subsided after mid - october, stock prices returned to record levels. markets have doubtless stabilized significantly after the turbulence of last fall but they remain fragile, as the repercussions of the recent brazilian devaluation attest. moreover, our chronic current account deficit

labor and standards of living by impeding the adjustment of the capital stock to its most productive uses. not so well understood, in my judgment, is the impact that fear of growing protectionism would have on profit expectations, and hence on the current values of capital assets. protectionism was a threat to standards of living when capital asset values were low relative to income. it becomes particularly pernicious in an environment, such as today ’ s, when that is no longer the case. in sum, it has been the ability of our flexible and innovative businesses and workforce that has enabled the united states to take full advantage of emerging technologies to produce greater growth and higher asset values. policy has facilitated this process by containing inflation and by promoting competitiveness through deregulation and an open global trading system. our task going forward – at the federal reserve as well as in the congress and administration – is to sustain and strengthen these policies, which in turn have sustained and strengthened our now record peacetime economic expansion. * * *