Most Americans would agree that if a factory cannot turn a profit without

pouring toxic waste into a community’s water supply, that factory should be shut

down—even if that means the loss of hundreds of jobs. When it comes to matters

of public health, the interests of the many outweigh those of the few.

Regarding the economic health of our nation, however, the American public

seems to place the interests of a few above the interests of the majority.

Economists concur that international trade and open markets are directly

responsible for greater consumer choice and a higher overall standard of living for

the American public. And yet 58 percent of those surveyed in a NBC/Wall Street

Journal poll taken at the end of 1998 said that foreign trade had been bad for

America. Why? Because open markets lead to cheaper imports that, in turn, can

cost some individuals their jobs.

How ironic that public resistance to open markets is rising just as our

economy is in the longest peace-time expansion in our history and employment

is at record levels.

Earlier this decade, I served as deputy U.S. trade representative. Opening

markets and expanding international trade was my chief concern as I negotiated

trade pacts with the countries of Europe and East Asia, including Japan and China.

As confident as I am that more open trade is crucial to the economic health of

America as we enter the next centur y, I am well aware it is not an easy matter

to change public opinion on open markets. One trade-related plant closure can

dramatically worsen public attitudes toward foreign competition, especially when

the closure puts hundreds of people out of work. It is more difficult to convince the

public that lower prices, higher-quality products, and resulting higher standards of

living are also linked to free trade.

This annual repor t focuses on the important and complex issue of international

trade, examining the costs and benefits of open markets. Our economic

well being is increasingly influenced by our ability to reach untapped markets:

Nearly four-fifths of world consumption currently occurs outside the U.S. With

this new century of increased globalization soon upon us, now is the time to address

concerns over the economic and social risks associated with bringing down

barriers to trade.

The great strength of the U.S. Constitution, so emulated worldwide, is the

careful balancing of the rights of the few with the interests of the many. As the

U.S. enters the next century we have the tremendous opportunity to extend these

principles to our trade policy. Some short-term job displacement no more justifies

holding back our entire economy than it does the operation of a factor y that puts

our environment at risk. But we must meet the needs of those who are directly

affected by foreign competition. We have an obligation to develop programs that

help those facing job cuts because of open markets. Only by reducing hardship

today can we reduce future backlashes against free trade.

The performance of the U.S. economy in 1998 was extraordinary despite

turbulence in foreign markets. Real GDP growth came in at a robust 4.3 percent

on a fourth-quarter to fourth-quarter basis. Inflation as measured by the Consumer

Price Index slowed to 1.5 percent in 1998. For the first time in 30 years inflation

was below 2 percent for two consecutive years. The unemployment rate averaged

4.5 percent for the year, the lowest level since 1969.

In 1999 we expect that real GDP growth will continue at a solid but more

sustainable rate, and that inflation and unemployment will continue to be favorable.

On a personal note, I’d like to extend my heartfelt appreciation for the hard

work of our dedicated staff, whose accomplishments are highlighted on pages 16

and 17. The achievements of the Federal Reserve Bank of Chicago also reflect the

outstanding leadership and counsel of our directors in Chicago and Detroit. Thank

you all. A special note of gratitude goes to directors Donald Schneider and Arnold

Schultz, who completed their service with the Chicago board in 1998. I would

also like to welcome James Keyes and Alan Tubbs, who joined the board at

the star t of 1999.

One of the highlights of our achievements this year was ensuring the

readiness of our important internal computer applications for Y2K. I am confident

that the success of the Federal Reserve and the banking industry this past year

will be echoed in 1999 by enhanced consumer confidence in industry preparedness

as we approach the millennium.

Michael H. Moskow

President and Chief Executive Officer

March 26, 1999