- The Washington Times - Monday, March 18, 2002

In the midst of what Federal Reserve Board Chairman Alan Greenspan has characterized in recent congressional testimony as "an economic expansion" that "is already well under-way," the Fed's monetary policy-making committee meets Tuesday to decide what, if anything, should be done with short-term interest rates. The Fed enacted 11 well-timed and much-needed reductions last year in the federal funds rate, which is the interest rate banks charge one another for overnight loans; Tuesday's meeting occurs at a time when that key short-term rate stands at 1.75 percent, a level not seen in four decades. Moreover, the nominal federal funds rate of 1.75 percent represents an inflation-adjusted rate near zero, a condition that clearly cannot persist over the long term. That said, however, now is not the time to raise it.
At the Fed's last monetary policy meeting in January, it left the federal funds rate at 1.75 percent, because, in its view, the risks then were still "weighted mainly toward conditions that may generate economic weakness in the future." Since then, much favorable economic news has emerged, especially a major revision in fourth-quarter economic output, which increased from an initially reported 0.2 percent annual rate to 1.4 percent. Moreover, the unemployment rate has declined for two consecutive months, falling to 5.5 percent in February, when actual payroll employment increased, albeit slightly, for the first time in seven months.
Consumer expenditures increased by a very robust 6 percent annual rate during the fourth quarter, bolstered by extremely favorable financial terms offered by the auto industry, which played a vastly underappreciated-but-crucial role as the nation's premier recession-fighter in the aftermath of September 11. At the same time, mortgage rates remain at historically low levels, keeping the housing sector and its attendant industries (appliances, carpet, furniture, etc.) quite vibrant.
All of these favorable factors confirm the amazing resilience of the U.S. economy, which was dealt a massive blow on September 11, at a moment when output had already been slowing significantly for a year. Perhaps most astounding of all, however, was the recent Labor Department report which revealed, contrary to previous experience during economic downturns, that worker productivity continued to rise during the recession. During the fourth quarter alone, productivity increased at an annual rate of 5.2 percent.
As Mr. Greenspan noted, the performance of productivity during the recent downturn augurs well for the long-term future. Regarding the short-term, as the figures cited above confirm, the Fed chairman says that he and his colleagues have identified "encouraging signs of strengthening underlying trends in final demand." However, he has also cautioned that "the dimensions of the pickup remain uncertain." As for the economic expansion that is "already well under way," Mr. Greenspan noted in the next breath that "an array of influences unique to this business cycle seems likely to moderate [the expansions] speed." Given the utter absence of any inflationary pressures currently in play or identifiable on the horizon, such caution calls for maintaining short-term rates where they are for the time being.

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