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To: IngotWeTrust who wrote (27216)	1/28/1999 6:57:00 PM
From: Lalit Jain	Read Replies (2) \| Respond to of 116764

Hi ole 49r, Greenspan says low unemployment does not equate to rising inflation. Greenspan buries NAIRU, Fed eyes capacity use data By Isabelle Clary NEW YORK, Jan 28 (Reuters) - Federal Reserve Chairman Alan Greenspan on Thursday shot down the notion that low unemployment breeds rising inflation in what analysts called the death nail of the NAIRU -- non-accelerating inflation rate of unemployment -- economic theory. Instead, analysts said, the Fed has been watching the NAICU, or non-accelerating inflation rate of capacity utilization. NAICU, a variant of the Phillips Curve, assumes that running factories past a certain level -- usually 82 percent of potential output -- would lead to rising inflation. Despite years of robust growth, capacity utilization rates have been low through this expansion which has led a number of Fed economists to look into the relationship between low factory usage and declining inflation. NAIRU, on the other hand, assumes inflation will rise once the jobless rate falls below its natural rate of about 6.0 percent. The U.S. jobless rate has been below that level since 1994, hitting a cycle low of 4.3 percent in December. Over the same period, inflation drifted down to 1.5 percent. ''I think that what the most recent months' evidence, indeed if not the recent years', is that the inter-relationship between tight labor markets, wage increases and price increases is clearly a far more complex process than is captured by the more simplistic views of a model based on NAIRU,'' Greenspan told the Senate Budget Committee. ''At some point, the general notion that a different type of process is involved here is going to probably gain, in my judgment, a majority view among economists,'' Greenspan also said, without elaborating on what that process may be. The Treasury market cheered Greenspan's NAIRU remarks because it removed fears the Fed would tighten on a strong employment report. New York Fed President William McDonough was the first senior Fed official to shoot down the NAIRU notion last November when he said ''the FOMC decided we were prepared to take the risk that theory was not valid.'' David Resler, managing director at Nomura Securities International, called the NAIRU ''a flawed measure of tightness in the economy which makes fairly useless as a practical guide to monetary policy.'' ''The performance of the U.S. economy has long refuted the hypothesis of a linkage between the unemployment rate and wage inflation or price inflation. Greenspan today just drove the nail in the coffin of the NAIRU,'' Resler said. ''The Fed is looking at another interpretation of the Phillips Curve, the NAICU, based on the capacity utilization rate. Capacity usage rates are low and tell us there should not be any inflation, and indeed, there is none,'' Resler added. Fed Board Director of Research Michael Prell, in recent remarks to the Charlotte Economics Club, noted ''the extraordinary divergence between the two traditional measures of resource utilization in the economy -- the overall unemployment rate and the factory utilization rate.'' ''If one focuses on the declining utilization rate, the low inflation of 1998 is not a surprise,'' Prell pointed out. ''We may be able to exploit this relationship in our forecasting.'' A Fed source recently told Reuters the Fed has been looking into NAICU as a predictor of inflationary pressures and research work on this issue is continuing. Many economists have been surprised that, in the current expansion, factories operate at tame capacity utilization rates in the low 80-percent area or even lower while economic growth runs at nearly 4.0 percent. ''For policymakers, what Greenspan says about the NAIRU is an important event,'' said Scott Hein, professor of economics at Texas Tech University. ''At some point, if it looks like it is working again, the NAIRU could come back in favor. But Alan Greenspan is saying it's not working and the Fed is not going to rely on it.'' Hein did not expect any opposition within the Federal Open Market Committee (FOMC) to Greenspan's view on the lack of usefulness of the NAIRU. Governor Laurence Meyer and Minneapolis Fed President Gary Stern have been, at times, strong proponents of the theory. ''Some are trying to allow the Phillips Curve idea to survive by replacing the reference to the unemployment rate with the capacity utilization rate. This is an example why we can't call the theory dead.'' Hein pointed out Greenspan's views were in line with the spirit of the Humphrey-Hawkins legislation that governs the Fed and that ties high unemployment with high inflation, because a large number of unemployed creates inefficiencies in the economy that end up being inflationary. ******************************************************* How about 100% employment eh! Another round of rate cuts ?? Cheers, Lalit Jain