- The Washington Times - Monday, March 15, 2004

Having effectively achieved their long-term goal of price stability, Federal Reserve Chairman Alan Greenspan and his colleagues on the Fed’s monetary policy-making committee meet today amid expectations that their target short-term interest rate, which has stood at a 45-year low of 1 percent since June, will remain unchanged.

Confirming the attainment of price stability, the core consumer price index, which excludes volatile food and energy prices, reached a four-decade low of 1.1 percent over the 12 months ending in November, and has remained at that level since then. That means the inflation-adjusted level of the Fed’s target short-term interest rate is essentially zero. Mr. Greenspan has reminded the markets on at least two occasions in recent months that the economy cannot operate indefinitely with 0-level real short-term interest rates. Based on recent speeches, statements and congressional testimony of various Fed officials, however, it is apparent that the Fed does not believe the time to raise short-term rates has arrived. That assessment is clearly correct.

After its last meeting in January, the Fed’s policy committee modified its statement of intentions. Beginning with its Aug. 12 meeting and lasting through its Dec. 9 meeting, the Fed declared that its “policy accommodation can be maintained for a considerable period.” The statement following January’s meeting said that the Fed “believes it can be patient in removing its policy accommodation.”

Such patience is obviously warranted. As Mr. Greenspan noted in a speech last week, “new job creation is lagging badly.” Indeed, despite the fact that economic growth during the second half of last year accelerated to the fastest pace in 20 years, nonfarm payrolls barely budged. Then, during the first two months of 2004, payroll growth continued to be disappointing.

The failure to generate adequate job growth in recent years was largely “the ironic consequence of accelerated gains in productivity,” Mr. Greenspan said. Even by the impressive record of the second half of the 1990s, productivity, or output per hour of work, skyrocketed in 2002 and 2003. Having increased at an average annual rate of nearly 2.5 percent from 1996 through 2000 — a rate of increase, by the way, that was about two-and-a-half times the average annual change during the 1974-1995 period — productivity in the nonfarm business sector soared to 5 percent and 4.4 percent in 2002 and 2003, respectively. That was higher than any other back-to-back two-year period in postwar history. In the manufacturing sector, productivity increased by 7.2 percent in 2002 and 5.1 percent in 2003, dwarfing the gains from 1996 through 2000.

Yesterday, the Fed released its industrial output data for February, which showed production rising by 0.7 percent following January’s 0.8 increase. That’s good news. But until output gains begin to generate expansions in payrolls, the Fed would do well to remain patient.

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