- The Washington Times - Tuesday, February 20, 2007

Federal Reserve Chairman Ben Bernanke will be a lucky man if all of his anniversary performances on Capitol Hill go as well as last week’s celebration went. Appearing before the House and Senate banking committees in his regularly scheduled, semi-annual visits, which closely followed his first anniversary as Fed chairman, Mr. Bernanke delivered the Fed’s “Monetary Policy Report to Congress” amid lots of good economic news from the recent past and the near-term future.

Even liberal Democratic Rep. Barney Frank, who recently became chairman of the House banking panel, felt compelled to “apologize in advance to the media” because he had “less to complain about than they might have hoped.” And then Mr. Frank got downright gushy. “I particularly want to begin by thanking you for the very appropriately nuanced discussion of wages,” the curmudgeonly committee chairman told the leader of the Fed, whose previous job was heading President Bush’s Council of Economic Advisers. Mr. Frank “particularly appreciated” the part of Mr. Bernanke’s prepared “testimony where you note that an increase in wages certainly to the level of productivity should not be a problem, and that, in general, there’s nothing automatic about a rise in wages leading to inflation.” Who said bipartisanship was dead?

Mr. Bernanke paved the way for his warm welcome by detailing good news about the economy both in his testimony and throughout the Fed’s monetary report. He and the Fed were able to report:

(1) The inflation-adjusted gross domestic product (GDP) expanded by 3.4 percent during 2006.

(2) Real consumer spending increased by 3.7 percent last year.

(3) Real business capital expenditures jumped by 6.8 percent during 2006, including a 11.7 percent rise in spending on nonresidential structures (factories, office buildings, retail space, etc.) and a 9 percent increase in investment in high-tech equipment.

(4) Real exports of goods and services soared by more than 9 percent last year.

(5) Corporate profits in the nonfinancial sector continued to rise as the ratio of pre-tax profits to sector GDP reached nearly 14 percent, the highest level since 1969.

(6) After rising by 3.3 percent in 2004 and 3.4 percent in 2005, the consumer price index (measured on a December-over-December basis) increased by only 2.5 percent last year.

(7) “[I]nflation pressures appear to have abated somewhat,” while the public’s critical “inflation expectations appear to have remained contained.”

(8) Broad equity indexes soared 10 percent to 20 percent last year.

(9) The interest rate on the 10-year Treasury bond averaged 4.56 percent in December, less than one-tenth of a percentage point higher than its average (4.47 percent) in December 2005.

(10) “[T]he average rate for a 30-year fixed-rate mortgage was 6.25 percent at the end of 2006, about the same as at the beginning.”

(11) The fourth-quarter unemployment rate was below 4.5 percent, its lowest level since the second quarter of 2001.

(12) Real hourly labor compensation, which includes wages and employer-paid benefits, increased 3 percent in 2006 after rising by an average of about 1 percent in 2004 and 2005.

(13) The average real hourly wage of private-sector production and nonsupervisory employees (not seasonally adjusted) increased by 1.8 percent during 2006 after declining during 2003, 2004 and 2005.

(14) While the increase in nonfarm-business-sector productivity decelerated 2.1 percent during 2006 (from 2.6 percent during 2005), the underlying productivity trends “appear favorable.”

Even in the troubled housing market, Mr. Bernanke said that “ome tentative signs of stabilization have recently appeared.” Observing that “[h]ousehold finances appear generally solid” and the “business sector remains in excellent financial condition,” Mr. Bernanke offered a forecast that had “soft-landing” (our term, not his) written all over it. The Fed expects the economy’s growth rate to moderate in 2007 and 2008, declining from 3.4 percent last year to “about 2.5 to 3 percent in 2007 and about 2.75 to 3 percent in 2008.” The Fed expects the unemployment rate to “finish both 2007 and 2008 around 4.5 to 4.75 percent.” The Fed’s preferred inflation index (the core personal consumption expenditures index, which excludes the food and energy sectors) is expected to return to Mr. Bernanke’s famous “comfort zone” of 1 percent to 2 percent, declining from 2.3 percent last year to about 1.75 to 2 percent in 2008.

If that forecast comes to fruition, Mr. Frank will likely continue to have “less to complain about than [the media] might have hoped.”


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