- The Washington Times - Monday, September 15, 2003

In the absence of any inflationary pressures whatsoever, the growth rate of the U.S. economy seems poised to accelerate significantly. Under current economic conditions, that combination is a prescription for status-quo monetary policy. That means Federal Reserve Chairman Alan Greenspan and his colleagues on the Fed’s monetary-policy committee will almost certainly retain the overnight interest rate at a four-decade low of 1 percent today. It is the right stance to take. That being said, nobody should confuse a “status-quo policy” with a “hands-off policy.” To the contrary, the Fed’s monetary policy in recent years has been — and continues to be — extraordinarily accommodative.

Two years ago this week, the Fed lowered its targeted federal-funds rate to 3 percent, matching the lowest level reached in 1992 in response to the 1990-91 recession. The Sept. 17, 2001, reduction was the eighth cut of that year, and it was followed by three more reductions over the next three months. Having begun 2001 at 6.5 percent, the federal-funds rate has stood at 1 percent since June. That’s what’s known in Fedspeak as being “sufficiently accommodative.”

Following the June 2003 meeting, where the Fed cut its target rate by one-quarter percentage point, the bond market felt it was victimized by a bait-and-switch scheme perpetrated by the Fed, which was accused of under-delivering after signaling a half-point cut. The bond market reacted by throwing a temper tantrum, which took the form of a nearly 1.25 percentage-point increase in the 30-year fixed mortgage rate. That has effectively ended a multi-year boom in refinancing, which has been indispensable in maintaining personal expenditures well above consumption levels experienced during previous downturns and slowdowns in the business cycle.

Monetary policy, of course, has not been the only government economic lever operating in overdrive. Fiscal policy has also been following an accommodative path, beginning with well-timed tax relief enacted in early 2001 that was accelerated and enhanced this year. From a surplus of $236 billion in fiscal 2000, the federal budget will likely record a White House-projected $455 billion deficit for fiscal 2003, which ends Sept. 30. When the latest Iraq-related supplemental of $87 billion is added to the 2004 projected deficit of $475 billion, it is clear that fiscal policy will remain aggressively accommodative at least through next year.

Notwithstanding the appropriately expansionary nature of U.S. monetary and fiscal policies, the labor market has remained extremely weak. Since the Fed began reducing short-term interest rates in January 2001, the economy has shed 3.3 million private-sector jobs through August, according to the Labor Department’s monthly nonfarm employment surveys. As economic growth significantly accelerates in a non-inflationary environment, reclaiming those jobs is reason enough for the Fed to — in Fedspeak — “follow a sufficiently accommodative path of monetary policy” for the “considerable period” to which it had committed itself after its last meeting.

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