- The Washington Times - Wednesday, April 24, 2002

In testimony last week before the Joint Economic Committee, Federal Reserve Chairman Alan Greenspan continued to offer upbeat analysis of the economy's evolving expansion from the recession that began in March 2001. Indeed, after the economy registered a surprising annual growth rate of 1.7 percent during last year's fourth quarter, most economic forecasters have been projecting that the economy's annual growth rate sharply accelerated during the first quarter this year, probably exceeding 4 percent and perhaps surpassing 5.5 percent.

The Fed chairman attributed much of this growth to a significant tapering off of the pace of inventory liquidation, while consumer spending has remained robust. In turn, industrial production has increased during each of the first three months of 2002, the first time that has happened since the spring of 2000. However, Mr. Greenspan did caution that sustained economic growth would depend on increases in final demand before the positive effects of inventory investment dissipate. Addressing the ongoing dispute between optimistic economists and pessimistic CEOs, who have complained that profits and capital expenditures have not paralleled recent spurts in the economy's growth rate, Mr. Greenspan optimistically declared, "The odds are very strongly in favor of [this dispute] being resolved in continued economic growth [and] resumption of profitability and capital investment."

He indicated that resolution of the issue would probably be determined during the next two to four months. In the meantime, Mr. Greenspan strongly hinted, the Fed's accommodating monetary policy would likely continue beyond the central bank's next meeting on May 7 and probably beyond the subsequent meeting in late June. That means that the overnight interest rate, which the Fed reduced 11 times last year to a 40-year low of 1.75 percent, would not increase until at least the middle of August.

Maintaining low short-term interest rates clearly is the best policy for the time being, since the economy exhibits little inflationary pressure at the moment. In fact, over the past 12 months, despite rising oil prices since November, consumer prices have increased by only 1.5 percent. Moreover, nearly a quarter of industrial capacity remains unused, while competitive pressures from the global economy and deregulation remain intense. At the same time, significant improvement in labor productivity over the past year, including a remarkable increase at an annual rate of 5.5 percent during the fourth quarter, "augurs well for firms' ability to grant wage increases to their employees without putting upward pressure on prices," Mr. Greenspan explained. Additional evidence pointing to a probable strengthening of the labor market can be found in the fact that layoffs have diminished noticeably in 2002, while the workweek has increased. So, once again, Mr. Greenspan appears to have things well in hand.



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