mr. greenspan presents the federal reserve ’ s semi - annual humphrey hawkins monetary policy testimony and report to the us congress testimony of the chairman of the board of the us federal reserve system, mr. alan greenspan, before the us congress on 24 / 2 / 98. mr. chairman and members of the committee, i welcome this opportunity to present the federal reserve ’ s semi - annual report on economic conditions and the conduct of monetary policy. the us economy in 1997 the us economy delivered another exemplary performance in 1997. over the four quarters of last year, real gdp expanded close to 4 percent, its fastest annual increase in ten years. to produce that higher output, about 3 million americans joined the nation ’ s payrolls, in the process contributing to a reduction in the unemployment rate to 4¾ percent, its lowest sustained level since the late 1960s. and our factories were working more intensively too : industrial production increased 5¾ percent last year, exceeding robust additions to capacity. those gains were shared widely. the hourly wage and salary structure rose about 4 percent, fueling impressive increases in personal incomes. unlike some prior episodes when faster wage rate increases mainly reflected attempts to make up for more rapidly rising prices of goods and services, the fatter paychecks that workers brought home represented real increments to purchasing power. measured consumer price inflation came in at 1¾ percent over the twelve months of 1997, down about 1½ percentage points from the pace of the prior year. while swings in the prices of food and fuel contributed to this decline, both narrower price indexes excluding those items and broader ones including all goods and services produced in the united states also paint a portrait of continued progress toward price stability. businesses, for the most part, were able to pay these higher real wages while still increasing their earnings. although aggregate data on profits for all of 1997 are not yet available, corporate profit margins most likely remained in an elevated range not seen consistently since the 1960s. these healthy gains in earnings and the expectations of more to come provided important support to the equity market, with most major stock price indexes gaining more than 20 percent over the year. the strong growth of the real income of workers and corporations is not unrelated to the economy ’ s continued good performance on inflation. taken together, recent evidence supports the view that such low inflation, as closely approaching price stability as we have known in the united states in three decades, engenders many benefits. when changes in the general price level are small

economy beyond those mentioned already regarding asian developments. without doubt, lenders have provided important support to spending in the past few years by their willingness to transact at historically small margins and in large volumes. equity investors have contributed as well by apparently pricing in the expectation of substantial earnings gains and requiring modest compensation for the risk that those expectations could be mistaken. approaching the eighth year of the economic expansion, this is understandable in an economic environment that, contrary to historical experience, has become increasingly benign. businesses have been meeting obligations readily and generating high profits, putting them in outstanding financial health. but we must be concerned about becoming too complacent about evaluating repayment risks. all too often at this stage of the business cycle, the loans that banks extend later make up a disproportionate share of total nonperforming loans. in addition, quite possibly, twelve or eighteen months hence, some of the securities purchased on the market could be looked upon with some regret by investors. as one of the nation ’ s bank supervisors, the federal reserve will make every effort to encourage banks to apply sound underwriting standards in their lending. prudent lenders should consider a wide range of economic situations in evaluating credit ; to do otherwise would risk contributing to potentially disruptive financial problems down the road. a second area of concern involves our nation ’ s continuing role in the new high - tech international financial system. by joining with our major trading partners and international financial institutions in helping to stabilize the economies of asia and promoting needed structural changes, we are also encouraging the continued expansion of world trade and global economic and financial stability on which the ongoing increase of our own standards of living depends. if we were to cede our role as a world leader, or backslide into protectionist policies, we would threaten the source of much of our own sustained economic growth. a third risk is complacency about inflation prospects. the combination and interaction of significant increases in productivity - improving technologies, sharp declines in budget deficits, and disciplined monetary policy has damped product price changes, bringing them to near stability. while part of this result owes to good policy, part is the product of the fortuitous emergence of new technologies and of some favorable price developments in imported goods. however, as history counsels, it is unwise to count on any string of good fortune to continue indefinitely. at the same time, though, it is also instructive to remember the words of an old sage