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Hearing of the Joint Economic Committee-Economic Outlook

Location: Washington, DC

Federal News Service

April 21, 2004 Wednesday







REP. RYAN: Thank you. Is this on? Well, Mr. English asked about one of the questions I wanted to ask, so I'm going to take a different tack. But I think if you look at the last year over monetary and fiscal policy, I think it's a good story that can be told. Number one, when the tax cuts were announced last January the markets responded favorably. When we got more into the serious business of actually writing the legislation in the spring, the markets clearly took that as a serious note, and when they passed in July I think we saw a great recovery where we had the greatest quarter growth in 20 years. Combine that with the fact that we had very accommodative monetary policy, with expansion of the monetary base, I think what you saw last year was a great success story in economic expansion to where we are today, where consumption is growing well, where we have business capital expenditures growing at double digits, the exports growing at double digits, to the point where we are today where the foretold employment expansion to the household survey tells us a good story. And even now the employment survey has shown that we have created 500,000 jobs since January, and to the point where we now see that disinflation or deflation is off of the horizon.

My question to you, Mr. Chairman, is this: Now that we do see that essentially deflation is off the horizon, why does the Fed seem to be ignoring sensitive market signals like gold commodities and the steep upward-sloping yield curve? These signals have traditionally placed advanced warnings of excess liquidity and inflation. Shouldn't the Fed at this time be looking at normalizing the federal funds rate? After all, having an economy that is growing an average of about five percent, and a Fed funds rate at one percent seems to be an unsustainable posture over the long run-shouldn't-wouldn't it be prudent to have small adjustments now, say before gold hits 500, so that we can avoid larger adjustments in the future, such as what took place in 1994?

MR. GREENSPAN: Congressman, I can't obviously stipulate where the Federal Open Market Committee is going to go or not go, because, one, I can guess, but I'm not sure, and in any event, if I could guess I shouldn't say what I guess. But the crucial difference between now and in the past is an extraordinary productivity acceleration. Remember that if you take the non-financial business structure of our domestic economy, you can disaggregate it in a manner to get the causes of price change. In other words, we know that two thirds of consolidated costs are unit labor costs. We know what proportion are import costs. And if you take the non-energy part of our non- financial business, we know what parts are energy costs, so that we can see the structure of costs moving.

What is different from the past is that in the past we had very little productivity gain and a very rapid response. Here what we are finding is that productivity is running in excess of compensation of employment, or has been, which means that unit labor costs are falling. To be sure, they are falling at a pace less than had been the case last year, but they are still falling. And that means that the price pressures are not anywhere near where they would be under normal circumstances.

And when you look at the past, the issue of addressing a particular potential inflationary problem has got to take into consideration all of the various elements involved in that current situation. And remember that any particular monetary policy that you embark upon has risks, and you have to balance the risks against the benefits. When you have the benefit of a very significant increase in output per hour, it means that you can go in a much more measured pace than you would be required to go in the past.

And the reason why we have stayed at one percent federal funds rate over all of this period is not that we thought that inflation had gone away and that it was no longer a problem; it's that we believe that given the underlying structure of costs and prices and profitability that the emergence of inflation at a reasonably rapid pace, which would create great concern on our part, was nowhere on the horizon. And that therefore we could calibrate the structure of monetary policy in a way that we did not have to take undue risks, which invariably you do no matter what the policy is. And that essentially is what our recent history has been.

Where we go from here is an issue that the Federal Open Market Committee will address in a couple of weeks and therefore.

REP. RYAN: Well, if an when you adjust or increase the Fed rate this year, will you make that decision based on the economy or based upon the budget?

MR. GREENSPAN: I'm sorry, on the economy or --

REP. RYAN: Or based upon the budget that Congress passes? The question is some will try to link any potential increase to what the budget deficit is or what the budget that passes through Congress is, versus whether or not you are going to look at all the other things, the factors in the economy.

MR. GREENSPAN: We look at the economy only, but to the extent that the budget affects the economy that then becomes a part. But we don't, as you put it, link monetary policy to whatever the Congress does with respect to fiscal policy.

REP. RYAN: Thank you.


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