Monetary Policy Report to the Congress
The economic expansion in the United States gathered strength during 2003 while price inflation remained quite low. At the beginning of the year, uncertainties about the economic outlook and about the prospects of war in Iraq apparently weighed on spending decisions and extended the period of subpar economic performance that had begun more than two years earlier. Over the second half of the year, in the absence of new shocks to economic activity and with gathering confidence in the durability of the economic expansion, the stimulus from monetary and fiscal policies showed through more readily in an improvement in domestic demand. Spurred by the global recovery in the high-tech sector and by a pickup in economic activity abroad, U.S. exports also posted solid increases in the second half of the year.

Still, slack in resource utilization remained substantial, unit labor costs continued to decline as productivity surged, and core inflation moved lower. The performance of the economy last year further bolstered the case that the faster rate of increase in productivity, which began to emerge in the late 1990s, would persist. The combination of that favorable productivity trend and stimulative macroeconomic policies is likely to sustain robust economic expansion and low inflation in 2004.
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Summary of Papers Presented at the Second Conference of the International Research Forum on Monetary Policy
Gregg Forte
The International Research Forum on Monetary Policy held its second conference on November 14 and 15, 2003. The organization is sponsored by the European Central Bank, the Board of Governors of the Federal Reserve System, the Center for German and European Studies, and the Center for Financial Studies. It was formed to encourage research on monetary policy issues that are relevant from a global perspective, and it organizes conferences that are held alternately in the euro area and the United States.

The 2003 conference, held in Washington, D.C., featured ten papers. Among the topics examined were the Great Inflation of the 1970s in the United States and the influence of learning, or adjustment of expectations, on policy outcomes; the tradeoffs between rules-based and discretionary monetary policy; the 1999 formation of the European Economic and Monetary Union and whether it altered the degree of economic integration between the United States and the euro area; the potential benefits of greater competition in the euro area; and optimal monetary policy in an international setting.
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Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003
Mark Carlson and Roberto Perli
Amid a strengthening economic expansion, U.S. commercial banks remained highly profitable in 2003. Return on assets reached a record level for the second year in a row, and return on equity was near the top of its recent range. Banks' profits were bolstered by decreased loan-loss provisions as a rising economy and considerable debt refinancing at very low interest rates led to lower delinquency rates on business and household loans. Fees associated with record mortgage refinancing activity and robust corporate bond issuance boosted non-interest income. Increases in non-interest expense were generally modest, although compensation-related costs rose more briskly. Lower long-term interest rates in the first part of the year allowed banks to realize gains on the sale of some of their securities, but they also contributed to a further shrinking of net interest margins. Banks' balance sheets expanded briskly, as the strong housing market and heavy refinancing activity boosted residential mortgages and mortgage-backed securities. Business loans ran off for a third year, albeit at a slower pace than in 2002 and 2003. Banks' regulatory capital positions strengthened further, as the growth of assets with low regulatory risk weights outpaced that of assets with higher risk weights.
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Report on the Condition of the U.S. Banking Industry: Fourth Quarter, 2003
Assets of reporting bank holding companies expanded $130 billion, or 1.6 percent, in the fourth quarter of 2003. Asset quality showed further improvement. Net income rose to $28.3 billion for the fourth quarter and to more than $100 billion for the year. Net interest margins recovered slightly for the quarter, having sustained steady contraction since late 2001. All of the aggregate quarterly earnings gains occurred at the "fifty large" bank holding companies, while aggregate earnings at "all other" bank holding companies declined slightly in the fourth quarter as they had in the third quarter.
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Announcements
Press releases and Board staff changes for the previous quarter.
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Legal Developments
Various bank holding company, bank service corporation, and bank merger orders.
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