During his two appearances on Capitol Hill this week, Federal Reserve Chairman Alan Greenspan offered an upbeat assessment of the U.S. economy. Acknowledging that the future pace of economic activity was unlikely to replicate the surge that occurred during the second half of last year, when gross domestic product soared at an annual rate above 6 percent, Mr. Greenspan nonetheless stressed that “recent data indicate that growth of activity has remained robust thus far this year.” He told the Senate Banking Committee on Wednesday that “the threats of deflation, which were a significant concern last year, by all indications, are no longer an issue before us.” On Thursday, he told the Joint Economic Committee that “the prospects for sustaining solid economic growth in the period ahead are good.”
While effectively declaring victory over the strong disinflationary forces that clearly threatened to tip the economy into a debilitating bout with deflation, Mr. Greenspan rightly appeared to be somewhat sanguine about the potential build-up of inflationary forces. To be sure, there has been some understandable concern over the fact that overall consumer price inflation has accelerated from 1.9 percent during 2003 to an annual rate of 5.1 percent during the first quarter of 2004. In addition, during the same periods, core consumer inflation, which excludes the volatile food and energy sectors, has accelerated from 1.1 percent last year to 2.9 percent for the first quarter. However, rather than viewing this development as an inflationary breakout, Mr. Greenspan apparently — and appropriately — considers it to be evidence that the Fed’s extraordinary anti-deflation efforts were successful.
Indicative of prevalent anti-inflationary forces, the Fed chairman cited “still-significant productivity growth and a sizable margin of underutilized resources, [which], to date, have checked any sustained acceleration of the general price level and should continue to do so for a time.” Moreover, in large part due to the nearly unprecedented productivity surge, unit labor costs declined more than 4 percent over the past two years, reaching a level today that is well below their average in 2000.
At the same time, Mr. Greenspan warned Congress and the financial markets that the Fed’s extraordinary, sustained, anti-deflationary and accommodative monetary policy could not continue indefinitely. Indeed, modern economies cannot soundly operate forever with negative real short-term interest rates.
Action by the Fed does not appear to be imminent;norshoulditbe.Mr. Greenspan’s congressional appearances merely represented the continuation of his carefully orchestrated efforts to prepare the markets for the inevitability of future rate increases. Mr. Greenspan is right to believe it is not too early to guide the economy toward a virtuous cycle characterized by both sustainable growth and long-term price stability.
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