- The Washington Times - Tuesday, January 27, 2004

More than two years after the economic recovery began, the Federal Reserve will end its January two-day meeting this afternoon amid universal expectations that its target short-term interest rate will remain at its 45-year low of 1 percent — where it belongs. The federal-funds rate, which is the interest rate banks charge each other for overnight loans, has been chopped by the Fed more than a dozen times over the past three years. The Fed has ratcheted down its target rate from its cyclical peak of 6.5 percent.

The federal funds rate has now remained below 2 percent for more than two years. Several analysts have interpreted signals from some Fed governors and regional bank presidents as strongly suggesting that the current fed-funds rate of 1 percent could remain unchanged for the duration of the year.

Interestingly, the atmosphere surrounding the previous monetary-policy committee meeting on Dec. 9 included a debate about whether the Fed should repeat in its press release its belief that “policy accommodation can be maintained for a considerable period.” Today, there appears to be widespread agreement among analysts that the Fed will almost certainly retain its projection of “policy accommodation” for “a considerable period.” What a difference an exceptionally lousy overall employment report for December makes.

Economists had been engaged in a simmering debate about whether the Labor Department’s monthly household survey was more reliable than its business-establishment (i.e., payroll) survey. In addition to estimating total employment, the household survey also provides the widely quoted monthly unemployment rate. The business-establishment survey generates the often-cited change in nonfarm payrolls, whose totals have been diverging from the household survey’s employment figures.

According to the household survey, December’s total employment level was nearly 700,000 higher than the survey’s previous cyclical peak, which was reached in January 2001. According to the business-establishment survey, whose figures have heretofore been considered to be the appropriate benchmarks against which monthly and cyclical fluctuations should be measured, December’s total nonfarm payroll employment level was nearly 2.5 million less than its cyclical peak, which was reached in February 2001. In the private sector alone, total employment, according to the business-establishment survey, was nearly 3 million below its peak level. Relying on publicly revealed preferences for the business-establishment survey by the Bureau of Labor Statistics, the Congressional Budget Office and Fed Governor Ben Bernanke, this newspaper has emphasized the numbers generated by the business-establishment survey of payrolls.

In the midst of the debate about which of the two surveys was more accurate under current circumstances, both turned in terrible results for December. The household survey revealed that the civilian labor force, which includes those employed and those seeking employment, shrank by more than 309,000 last month, indicating that people quit looking for work because they believed jobs were unavailable. The household survey also revealed that employment fell by 54,000 last month. Meanwhile, the business-establishment survey estimated December job growth at a meager 1,000 jobs, falling 149,000 jobs below expectations. Worse, revisions to October and November payrolls lopped 51,000 jobs from initial estimates.

Having expressed its concern with the inability of the labor market to strengthen more than two years after the recession officially ended, the Fed would do well to announce once again that “policy accommodationcanbemaintainedfora considerable period.”

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