Before I go any further, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the FOMC or others in the Federal Reserve System. Our Dual Mandate Goals While our monetary policy approach has shifted, our fundamental goals have not. The Fed has two goals set by Congress: maximum employment and price stability. These “dual mandate” goals remain on an equal footing, and our commitment to delivering on both has not changed. In addition, our assessment that a 2 percent long-run inflation rate is most consistent with achieving both of our dual mandate goals is unaltered. What has evolved is how we think about best achieving them. Like all institutions, the Federal Reserve must be responsive to changing circumstances and adapt to new realities. Since 2012, we have learned a great deal about the behavior of the economy, employment, and inflation— both in the short and longer run—and these lessons have informed our approach to policy. There are three key takeaways worth highlighting: First and foremost is the secular decline in the neutral rate of interest, or r-star, which has brought neutral real interest rates to near zero in the United States. This decline in r-star in turn implies that the constraint on monetary policy from the lower bound on nominal interest rates has become a central aspect of the landscape with which policymakers must contend.
But the figures collected by the HKMA for the local banks’ Hong Kong offices show that, in aggregate, their pre-tax operating profits rose by about 15% in 1999. This compares with the decline of 33% that we saw in 1998. This improvement has been supported by renewed growth in net interest income. Moreover, the aggregate bad debt charge of the local banks showed little change in 1999, having increased by 335% in the previous year. It is true that some banks were obliged to increase their provisions against Mainland related companies during the course of the year. But the general trend in the latter part of 1999 was that the growth in new problem loans began to slow down as the economy improved. This is supported by the figures for problem loans in the final quarter of 1999 which we published recently. These show that the ratio of loans classified as “substandard”, “doubtful” or “loss” to total loans fell to 9.8% at the end of December, compared with the 1999 peak of 10.3% at the end of September. At the risk of tempting fate it does seem that the worst of the bad debt problems for Hong Kong banks is over. Certainly all the local banks are expecting a significant reduction in the bad debt charge in 2000, which will give a boost to profitability. Can we say therefore that life for the local banks is getting back to where it was prior to the crisis? The answer unfortunately has to be “no”.