- The Washington Times - Tuesday, May 7, 2002

Federal Reserve Chairman Alan Greenspan and his colleagues on the Fed's monetary policy-making committee meet today in the wake of Friday's report showing the unemployment rate rising steeply in April and an earlier report revealing the economy growing at a robust rate during the first quarter. What gives?

The unexpectedly large increase in the unemployment rate, which jumped from 5.7 percent in March to 6 percent in April, was not nearly as bad as it seemed. For the first time since July, for example, nonfarm payrolls actually increased. But the relatively modest increase of 43,000 jobs was swamped by a much larger expansion of the labor force.

Still, labor market trends are moving in the right direction. While overall employment levels have been relatively flat for the past three months, the Labor Department noted that the economy lost nearly 150,000 jobs per month from March 2001, when the recession began, through January 2002, when economic growth accelerated. Moreover, although the manufacturing sector lost 19,000 jobs in April, the pace at which it has been shedding jobs has slowed considerably during the past three months. Meanwhile, service jobs increased by nearly 150,000 positions in April.

However, just as the increase in April's unemployment rate wasn't as bad as it seemed, it is also true that the economy's 5.8 percent annual growth rate registered during the first quarter was not nearly as robust as it appeared to be. Excluding the inventory component, which added more than 3 percentage points to the growth rate, and defense- and public-works-related government spending, which added another 1.5 percentage points to growth, the economy grew by an annual rate of less than 1.3 percent during the first three months. With the recovery progressing at only a moderate pace, at least so far, the Fed is unlikely to raise short-term interest rates today. Nor should it.

After 11 Fed-engineered interest rate cuts last year, which left the overnight rate at 1.75 percent, its lowest level in more than four decades, monetary policy should continue to remain in an accommodating position. That means keeping short-term interest rates at today's low levels, at least for the time being. This is the right policy.

To begin with, final demand, which excludes changes in inventory, is currently growing at a rate insufficient to reduce the unemployment rate. Second, there is very little inflationary pressure in the economy. After increasing by 2.7 percent in 2000 and by an annual rate of 3.2 percent during last year's first quarter, the price index for personal consumption expenditures a key inflation guage for the Fed has significantly decelerated, rising by an annual rate of only 0.6 percent during this year's first quarter.

Under these circumstances, rather than tighten monetary policy, the Fed ought to just sit tight itself.

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