- The Washington Times - Monday, January 26, 2004

Trying to discern the Federal Open Market Committee’s (FOMC) outlook for the economy, especially employment and productivity, can be an exercise in frustration. But that’s not necessarily bad.

The FOMC is made up of the seven Federal Reserve governors, the president of the Federal Reserve Bank of New York, and four other Reserve Bank presidents who serve one-year rotating terms. Their utterings have the power to move markets, though they are sometimes less than enlightening.

Federal Reserve Board chairman Alan Greenspan, at a Bundesbank forum in Berlin on Jan. 13, expressed optimism about U.S. job growth. In reply to a question, he said, “It’s just a matter of time before we begin to see employment start to pick up quite significantly, as it always has in the past.” Just how much time he had in mind wasn’t clear. He also anticipated slower productivity growth.

A week earlier Fed Gov. Ben S. Bernanke told members of the American Economic Association he agreed with forecasts of about 4 percent economic growth this year with a modest decline in the unemployment rate. Consistent with Chairman Greenspan’s statement, he said, “As employment begins to pick up and the recovery matures, productivity growth is likely to decelerate, perhaps markedly. Nevertheless, slow growth in wages and the return to normal of price-cost markups should help keep inflation low.”

An alternative interpretation suggests itself. If we have sharply reduced productivity growth and expanding employment, unit labor costs might be expected to rise, exerting upward pressure on prices.

For employment to rise sufficiently to reduce unemployment, as Gov. Bernanke expects, productivity growth would have to fall precipitously, to around 2 percent, allowing for population growth and some rise in both labor force participation and the workweek. Productivity change, as measured, is admittedly not a stable number. But is such a sharp and sudden decline in productivity reasonable to expect? Information technology has surely raised the floor under productivity growth. Thus, it seems unlikely economic growth of 4 percent this year would be sufficient to lower the unemployment rate.

Fed Gov. Donald L. Kohn, speaking at a Federal Reserve seminar in Philadelphia in late September, expressed reservations about the economy. “Because this cycle has been unusual, historical precedents or patterns have not provided much guidance about the future.” Further, he rightly noted “the persistent outsized increases in productivity testify to the continuing potential of using new technologies to achieve greater efficiencies, and we have no reason to think that they have been fully exploited.” Although Gov. Kohn’s remarks were made earlier, there appears to be some difference between his views and those of his colleagues.

There also seems to have been a division among FOMC members at their meeting of Oct. 28. (The minutes of their meeting on Dec. 9 aren’t yet available.) Striking an uncertain note, some members felt the likelihood “of substantial further employment gains was unclear at this point, given evidently continuing business efforts to respond to growing demand by improving productivity rather than hiring new workers.” At least until “a major uptrend in final sales was firmly established.” On the other hand, “members nonetheless expressed the view that … business confidence would continue to improve and induce greater investment and workforce expansions.”

The minutes of FOMC meetings do not say who said what, so the differing views on employment were presumably stated by different members.

Less equivocally, some members at the meeting emphasized “the prospects for persisting slack in labor and other resources in combination with substantial further increases in productivity … damping employment, labor costs, and price pressures.”

Pity the Fed watcher who is looking for a clear signal or a consistent message. Fortunately, markets have some degree of sophistication and, unless misled, can usually be relied on to sniff out whatever is to be learned and shrug off forecasts that lead in multiple directions.

Of course group-think is hardly desirable. It would be disastrous to have an FOMC whose members thought alike. A diversity of viewpoints is healthy and necessary and doubtless results in more informed decisions about monetary policy. If the absence of a clear signal is the price of optimum policy, then so be it. However, the effect on markets could only be salutary if the Fed would make it’s economic forecasts available to the public on a timely and regular basis.

Alfred Tella is a former Georgetown University research professor of economics.

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