Bulls hope that this Meyer stuff about below trend growth never comes about:
Fed's Meyer Says US Economy May Have to Slow Below 'Trend'
Boston, June 6 (Bloomberg) -- The U.S. economy may have to slow for a time below the pace necessary to keep inflation in check, Federal Reserve Governor Laurence Meyer said.
Even with the benefits of productivity-boosting technology, low unemployment is still a potential cause of inflation, Meyer said, dismissing ``the broader interpretation of the new economy concept'' in the text of remarks to a group of economists in Boston.
The economy could probably grow at a ``trend'' pace of 3.5 percent to 4 percent a year without causing inflation to accelerate, Meyer said. That's slower than the 4-percent-plus growth of the past three years. Moreover, the current unemployment rate of about 4 percent is probably still too low, Meyer said.
If the level of unemployment that leads to accelerating inflation ``turns out to be closer to 5 percent, then the task is more demanding, and growth will have to slow to below trend for a while,'' he said. In addition, ``Inflation is likely to rise somewhat further until the rebalancing is complete.''
Meyer said a series of six interest-rate increases by the Fed over the past year gave Fed policy-makers a ``head start'' in their inflation fight, ``before the signs of building inflation pressures were evident.''
In its latest move, the Fed last month raised the overnight bank lending rate to 6.5 percent, the highest in nine years, pushing short- and long-term market interest rates higher to cool consumer and business demand. Those higher rates will have to stay in place for some time if the Fed is going to slow the economy enough, Meyer said.
Strong Position
Because the economy is starting from a strong position, ``several considerations provide some optimism that the outcome will be a benign one -- a soft as opposed to a hard landing,'' he said. ``Even if we have to slow growth to below trend for a period, the resulting growth rate could remain well above the average growth rate over the previous 25 years and still get the job done.''
Meyer said there's evidence that annual productivity gains have doubled to about 3 percent at the end of the 1990s from about 1.5 percent in prior decades. That's allowed the economy to grow faster than previous thought possible without triggering an inflation outbreak, because it boosts the economy's ability to supply goods and services without raising costs.
Productivity also boosts demand because it encourages further business investment, he said. In fact, ``During the period over which productivity has accelerated, demand has grown faster than potential supply.''
The results are clear signs that inflation -- including ``core'' prices excluding oil and food -- has been accelerating over the last six to nine months, Meyer said. That's why the Fed has to slow growth, he said.
``The payoff from monetary restraint will be both to contain the risk of higher inflation and to extend the life of this remarkable expansion,'' Meyer said.
Jun/06/2000 20:43 |
