of the reduction in pricing power observed in this cycle should be reversed as firming demand enables businesses to take back large price discounts. though such an adjustment would tend to elevate price levels, underlying inflationary cost pressures should remain contained. a lack of pressures in labor markets and increases in productivity are holding labor costs in check, resulting in rising profit margins even with inflation remaining low. although energy - using companies will experience some profit pressures as recent increases in spot oil prices become imbedded in contracts, these effects should be limited unless oil prices increase appreciably further. to be sure, over time, the current accommodative stance of monetary policy is not likely to be consistent with maintaining price stability. but prospects for low inflation and inflation expectations in the period ahead mean that the federal reserve should have ample opportunity to adjust policy to keep inflation pressures contained once sustained, solid, economic expansion is in view. improved profit margins over time and more assured prospects for rising final demand would likely be accompanied by a decline in risk premiums from their current elevated levels toward a more normal range. with real rates of return on high - tech equipment still attractive, the lowering of risk premiums should be an additional spur to new investment. reports from businesses around the country suggest that the exploitation of available networking and other information technologies was only partially completed when the cyclical retrenchment of the past year began. many business managers still hold the view, according to a recent survey of purchasing managers, that less than half of currently available new and, presumably profitable, supply - chain technologies have been put into use. recent evidence suggests that a recovery in at least some forms of high - tech investment is under way. production of semiconductors, which in the past has been a leading indicator of computer production, turned up last fall. expenditures on computers rose at a double - digit annual rate in real terms in the fourth quarter. but investment expenditures in the communications sector, where overcapacity was substantial, as yet show few signs of increasing, and business investment in some other sectors, such as aircraft, hit by the drop in air travel, will presumably remain weak in 2002. on balance, the recovery this year in overall spending on business fixed investment is likely to be gradual. the u. s. economy has displayed a remarkable resilience over the past six months in the face of some very significant adverse shocks. but the strength of the economic expansion that is under way remains to be clarified

susan schmidt bies : sound capital and risk management remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the oprisk usa 2006 conference, new york, 29 march 2006. * * * i would like to thank the sponsors of oprisk usa for providing an opportunity for bankers, regulators, consultants, and other interested parties to share their perspectives on operational - risk management. today, i will speak about the importance of risk management and its relationship to capital. i will also touch on the broad objectives of effective operational - risk management and offer specific observations on some of the challenges of operational - risk quantification. in addition, i will describe the current status of the basel ii process. importance of risk management over the past several decades, we have witnessed substantial changes in the u. s. banking industry, particularly at our largest institutions. these very large entities have broad geographic reach, operate in many lines of business, and offer a wide array of complex products and services. the largest institutions have moved away from the traditional banking strategy of holding assets on the balance sheet and have adopted strategies that emphasize redistribution of assets and active management of risks. the risk - management techniques employed by banking organizations continue to improve and adapt to the ever - changing financial landscape. the federal reserve, in its role as both a bank supervisor and the nation's central bank, has an obvious interest in maintaining the stability of the banking industry and the financial system as a whole. we, along with our counterparts at the other u. s. bank and thrift regulatory agencies, are responsible for ensuring that banking institutions operate in a safe and sound manner and have strong capital levels. but with the advent of very large banking organizations that engage in a wide variety of business activities - - some of them quite complex - - the federal reserve has become even more interested in ensuring that banking organizations understand the risks of these activities. for their part, bankers continue to improve the risk - management and risk - measurement processes at their institutions, and regulators have supported these efforts. banks themselves have created many of the new techniques to improve their risk management and internal economic capital measures in order to be more effective competitors and to control and manage their losses. by more clearly defining risk exposures and identifying the causes of and controls for their losses, bank management can more effectively integrate decisions about risk - taking into their strategic and tactical decisionmaking. banks that integrate risk measurement into their business - line goals often