meant to post this yesterday, and became distracted...sounds like the fed is saying this time was different??
story.news.yahoo.com
FOMC Minutes Show Worry Over When Job Market May Recover
Thu Dec 11, 3:12 PM ET
By Joseph Rebello
WASHINGTON -- The Federal Reserve (news - web sites)'s top policymakers fretted at a meeting six weeks ago the U.S. jobs market might not recover fully until late 2005 "or even later," even if the economy were to grow at an above-average pace.
Members of the Federal Open Market Committee (news - web sites) believed the economy would grow " at a pace near or somewhat above" its potential for the next two years, according to minutes of a meeting they held on Oct. 28.
But they said growth wouldn't generate a quick recovery in the battered U.S. labor market or fan inflation because employers appeared set to obtain " substantial further increases in productivity" from workers.
"Members generally anticipated that an economic performance in line with their expectations would not entirely eliminate currently large margins of unemployed labor and other resources until perhaps the latter part of 2005 or even later," according to the minutes, which the Fed released Thursday. Under the circumstances, the policymakers said, inflation would probably remain at "very low levels over the next year or two."
Those views cast new light on the Fed's recent assertions, most recently on Tuesday, that it can afford to keep interest rates low for a "considerable period" despite the sharp acceleration in economic growth recently. Most analysts have taken that to mean the Fed won't begin raising its key federal funds rate at least until the middle of 2004. The minutes could push those expectations out into 2005.
At the time the policymakers met in October, the economy was showing signs of a resurgence that have only grown stronger since. The U.S. gross domestic product expanded by a whopping 8.2% in the third quarter, the fastest pace in nearly 20 years. That is well above the range of 3% to 4.25% economists regard as the economy's potential rate.
Many analysts, as a result, began to bet on a quick rebound in the labor market, which has shed more than three million jobs since 2001. But labor- productivity growth has continued to surpass economic growth, allowing employers to meet increased economic demand with reduced work forces. Since the summer, employers have added just 328,000 nonfarm workers to their payrolls. The unemployment rate, however, has fallen in that time by one-half percentage point to 5.9%.
Fed policymakers have long feared that a persistently sluggish jobs market could frighten consumers into reining in their expenditures, derailing the recovery in the process. At their October meeting, Fed policymakers acknowledged the labor market had begun "to show signs of stabilizing" -- a view they amended this week to "improving modestly."
But they also expressed graver doubts about the outlook than they have previously acknowledged in public. "The extent to which recently positive labor- market developments might be harbingers of substantial further employment gains was unclear" because employers continued to meet demand by "improving productivity rather than hiring new workers," they said.
Fed policymakers usually say two things about productivity growth -- that it is "unambiguously good" for the economy and that the current pace of growth can't be sustained for long. Fed Chairman Alan Greenspan (news - web sites), for example, recently referred in a speech to a "dwindling pool of possible efficiencies" in labor " increasingly favor a revival in job creation."
But FOMC members, at their October meeting, fretted about the possibility that rapid productivity growth might persist. Some of them argued, "The growth in productivity could remain higher than earlier had been anticipated, damping employment, labor costs and price pressures," the minutes say.
Under the circumstances, the policymakers said, the Fed didn't need to preempt inflation in the way it has for much of the last 20 years. "The degree of slack in resources and a rate of inflation that was essentially consistent with price stability suggested that the committee could wait for more definitive signs that economic expansion would otherwise generate inflationary pressures before making a significant adjustment to its current policy stance," they said, according to the minutes.
Some members of the committee nevertheless said the Fed may soon need to alter its assessment of the "balance of risks" -- even though they implied such a change wouldn't be an immediate precursor to higher interest rates. Those members, the minutes said, expressed support for the FOMC's determination to keep rates low for a "considerable period" but "commented that the time for some changes in the current risk assessments might be approaching if the economy continued to strengthen in line with recent experience."
At its meeting Tuesday, the FOMC judged the economy was just as likely to grow above its potential growth rate as below that rate. But it signaled a diminishing risk of deflation, saying the risk of inflation is now "almost equal" to the risk of deflation. The October minutes suggested the latter assessment could be soon be upgraded to "equal" without signifying a near-term increase in interest rates.
The policymakers said the economy is "emerging from an atypical period" in which historical experience is a poor guide to the outlook. "Developments in the next few months, notably including the strength of holiday sales, should provide an improved basis for judging the underlying momentum of the expansion," they said, according to the minutes.
The FOMC also took a formal step to improve its public-communications strategy, which has been criticized sharply this year as the central bank has made abrupt and often controversial changes in the language of its public statements. The committee decided to form a "working group" consisting of some of its members to "develop a limited number of specific proposals for consideration at a later meeting."
A Fed spokeswoman said Thursday that group will consist of Fed Vice Chairman Roger W. Ferguson, Governors Edward M. Gramlich, Ben S. Bernanke and Donald L. Kohn, Michael Moskow, president of the Chicago Fed, Gary Stern, president of the Minneapolis Fed and Robert Parry, president of the San Francisco Fed.
-By Joseph Rebello; Dow Jones Newswires; 202-862-9279; joseph.rebello@dowjones.com |
