Alan Greenspan, chairman of the Federal Reserve, thinks domestic demand is slowing to a rate more in...
Alan Greenspan, chairman of the Federal Reserve, thinks domestic demand is slowing to a rate more in line with the economy's potential supply; that the tapering off of consumer purchases of durable goods may be for real; and that the reduced growth in output is being matched by a concomitant reduction in hours worked, leaving strong productivity growth intact.
But he isn't sure.
Still, if the temperate growth of the second quarter turns out to be a taste of things to come, the Fed's work may very well be done, the Fed chief implied last week in Senate testimony, and to the applause of financial markets.
This is a different Greenspan than the one who went up to Capitol Hill last February to present the Fed's monetary policy report to Congress, previously known as the Humphrey-Hawkins testimony. At that time, the chairman told the markets in no uncertain terms that the economy was growing too fast and short- term rates were headed higher.
Five months and 75 basis points later, Greenspan is hopeful the Fed has accomplished its mission, the standard central banker caveat about uncertainties and acknowledgment of accelerating inflation notwithstanding.
Overall, however, his message was upbeat.
"The more modest pace of increase in domestic final spending in recent months suggests that aggregate demand may be moving closer into line with the rate of advance in the economy's potential, given our continued impressive productivity growth," Greenspan said.
"Should this favourable outcome prevail, the immediate threat to our prosperity from growing imbalances in our economy would abate."
Since the Fed's semi-annual report to Congress, until recently required by law, is supposed to reflect the range of policy-makers' concerns, Greenspan warned, in as subtle a way as a central banker can, that the unemployment rate, currently at 4%, may be too low.
"Even if the growth rates of demand and potential supply move into better balance, there is still uncertainty about whether the current level of labour resource utilisation can be maintained without generating increased cost and price pressures," the chairman said.
The fact that the warning was buried in the final third of the testimony and couched in soft language suggests that pushing up the unemployment rate is not a high priority.
Nor is it on the committee's to-do list either. The Fed's central tendency for the unemployment rate is "about 4%" for the year 2000 and 4% to 4.25% for 2001. The central tendency is more a target than a forecast. Since the Fed is one of the few institutions with the power to make its forecast become reality, the steady unemployment rate target implies that, save a marked acceleration in inflation, policy-makers aren't about to raise the federal funds rate for the sole purpose of putting people out of work.
Durables spending is different than other consumption, Jim Glassman, senior economist at Chase Securities, explains, because it produces a service. Consumers buy durable goods specifically for the flow of services they deliver.
What's more, "durables spending behaves like investment in that it moves in long waves," Glassman says.
"The weight that Greenspan put on the slowdown in consumer durables purchases compared with the list of reasons to be cautious (about its permanence) was so out of proportion as to suggest he believes it's sustainable."
If that's the case and Greenspan has come up with a working hypothesis to support his view, it will take more than a few economic numbers to dissuade him, Glassman believes.
"He's telling you that the slowdown is entrenched."
Caroline Baum Bloomberg, New York
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