same quarter of 2004. seasonality is a significant factor for community banks. on first review, it would be logical to conclude from community banks'earnings and profitability figures that these banks are less profitable than large institutions and thus are competitively disadvantaged. indeed, large banks - - those with more than $ 10 billion in assets - generate higher rates of profitability, with returns on average equity in the 15 percent range. this difference in profitability makes economic and market sense, for a number of reasons : community banks are subject to less earnings volatility than large banks. competitive conditions and the sources of earnings at community banks also differ from those of large banks. for example, in aggregate, community banks have historically paid 10 to 20 basis points more than the industry as a whole on their savings and money market deposits, demonstrating their interest in attracting and retaining core deposits. further, the underlying business paradigm at community banks is quite different than that of large institutions. many community banks are family owned, and many more are closely held, which means there is minimal pressure on quarterly earnings performance. comparisons of community and large banks naturally raise the broader question of how small banks can compete successfully with large banks. to answer this question, one needs to stratify these banks on the basis of profitability. this stratification reveals that, in nearly every area of bank performance, the financial results of the best - performing community banks match up well with results of the big banks - - most notably in the area of efficiency. one might expect large banks to operate more efficiently because of their scale of operations. and in 2004, community banks as a whole did report an overall efficiency ratio of 65 percent, which was much less favorable than the 58 percent figure for large banks. yet surprisingly, the top - performing community banks outperformed the large banks, delivering an efficiency ratio of 56. 6 percent. another key strength of top - performing community banks is capital. the top one - fifth of community banks, in terms of their profitability, hold capital that is 40 to 50 percent greater than the industry average. the top quintile's leverage ratio was 11. 10 percent in 2004, compared with 7. 99 percent for all banks, or 38. 9 percent higher than the industry average. when compared with the large - bank ratio of 7. 41 percent, top - performing community bank capital ratios were some 49. 8 percent higher. the effects of consolidation are as evident for community banks as for the

of the economic expansion and, second, the evolution of inflation and inflation expectations. as i have indicated, the economic expansion is showing increasing signs of being both strong and self - sustaining. however, to my mind, some uncertainty about that sustainability remains, arising primarily from the slow recovery of the labor market. indeed, if one takes into account the long delay between the official recession trough and the trough in employment, the labor market today remains at what effectively is an early stage of its normal cyclical expansion. although the recent improvement in employment is encouraging, from the data in hand it is not yet clear that employers have overcome their reluctance to hire at a normal pace. additional confirmation that the recovery in the job market is both sustainable and quickening would be most welcome. regarding inflation, as i noted earlier, the economic fundamentals appear consistent with core inflation's remaining under control, in the general range of 1 to 2 percent. in particular, i see no indication that the u. s. economy is in imminent danger of overheating, productivity growth is keeping the lid on labor costs, and the effects on inflation of the increases in commodity prices and the decline in the dollar to date, which are likely to be small in any event, may well have dissipated a year from now. as i have acknowledged, however, there are risks to my relatively sanguine inflation forecast. in particular, a rise in the public's expectations of inflation, whether “ justified ” by underlying forces or not, may put upward pressure on the actual rate of inflation. moreover, expectations of inflation can themselves be destabilizing, as when an “ inflation scare ” in the bond market inappropriately raises long - term yields, with adverse effects for the real economy. to avoid instability in expected inflation, and the volatility in actual inflation, output, and employment that might result, i believe that the federal reserve should maintain at all costs its hard - won credibility for keeping the inflation rate low and stable. that involves, at a minimum, formulating policy with a close eye to indicators of inflation and inflation expectations. more generally, as i have suggested in earlier talks, i believe that the fomc's credibility and clarity would be enhanced if it announced the inflation range with which it would be comfortable in the medium term ( bernanke, 2003a, 2003b ). in particular, policy would be both more coherent and more predictable if fomc members shared an explicit common objective for