- The Washington Times - Monday, October 27, 2003

Amid anticipation over the Commerce Department’s Thursday “advance” estimate of the growth rate of gross domestic product (GDP) for the third quarter, the Federal Reserve meets today to decide its policy for short-term interest rates over the next six weeks. The Fed is widely expected to maintain its target for the overnight federal-funds rate at 1 percent. That would be the right choice. Maintaining an accommodative monetary policy at this stage of the business cycle is clearly the right thing to do.

Many economists have projected that the economy grew at an annual rate of 6 percent or higher during the third quarter. Such acceleration would be a welcome development for an economy that has not expanded at so rapid a pace in any quarter since the last three months of 1999. Indeed, the second half of 1999, when the annual growth rate exceeded 6 percent, was the last time that the economy roared ahead. Growth fell below 4 percent during the first half of 2000 and limped along at less than 1 percent during the second half of 2000. Recession soon followed, as GDP declined during each of the first three quarters of 2001.

Truth be told, the U.S. economy experienced a feeble 12 quarters from the second half of 2000 through the first half of this year. Over that three-year period, the economy grew by a meager 4.6 percent. That works out to an average annual rate of 1.5 percent — for three years. The unemployment rate increased from less than 4 percent to more than 6 percent.

Despite the evident acceleration of economic growth during the third quarter, nonfarm employment, which is considered a coincidental economic indicator, has barely budged. In fact, it increased by only 57,000 during September, which was the first month since January that employment did not fall. Average monthly employment during the third quarter was still 146,000 below it second-quarter level and 500,000 below the fourth-quarter level.

Meanwhile, inflationary pressures remain dormant. While energy prices increased by nearly 15 percent over the past year, the overall consumer price index has risen less than 2.5 percent during the past 12 months. Excluding volatile energy and food prices, consumer prices this year have been rising at an annual rate of 1.1 percent through September. That is significantly below the 2.7-percent pace for all of 2001 and the 1.9-percent rate in 2002.

While inflation-adjusted short-term interest rates cannot — and should not — remain below zero indefinitely, the time to raise them has not yet arrived. Until the labor market exhibits sufficient strengthening, which would be manifested by job-creation numbers above 200,000 per month for several months, the Fed should continue to signal that its overnight target rate will remain at its 45-year low for the “considerable period” that the Fed projected following its last two monetary-policy meetings.

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