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Economists say prices must go up { May 2007 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZf7Cm220prw&refer=hhttp://www.bloomberg.com/apps/news?pid=20601087&sid=aZf7Cm220prw&refer=h
Fed Splits With Staff Over U.S. Economy's Speed Limit (Update2)
By Scott Lanman
June 27 (Bloomberg) -- Federal Reserve policy makers disagree with their own staff economists, and a growing chorus on Wall Street, who say the U.S. economy can't expand as fast as it used to without pushing up prices.
The split, signaled in the minutes of May's Federal Open Market Committee meeting, may reflect debate over whether a slowdown in U.S. productivity is permanent. ``Many'' FOMC members were ``somewhat more optimistic'' than lower-ranking officials about the economy's speed limit, the records showed.
Policy makers, who meet today and tomorrow, are probably more confident that productivity -- a gauge of employee efficiency -- will rebound as economic growth picks up. A lower potential pace of expansion might force the central bank to keep interest rates higher than would otherwise be the case.
``The basic difference is that the FOMC is somewhat more skeptical'' that the trend has changed, said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, who formerly worked at the Federal Reserve Bank of New York. ``It's ultimately going to mean a bigger monetary policy response down the road if they do make a mistake.''
A year ago, most economists said the potential economic growth rate was about 3 percent. It may now be 2.5 percent, according to Lehman Brothers Holdings Inc. and JPMorgan.
Recent papers by Fed economists imply that the central bank staff sees potential growth of about 2.5 percent a year, said Kasman's colleague Michael Feroli. Feroli worked at the Fed from 2003 to 2005.
Reluctant to Estimate
While some policy makers won't give public estimates, Kansas City Fed President Thomas Hoenig stuck to the 3 percent figure in a June 6 speech in Cody, Wyoming. Michael Moskow, head of the Chicago Fed, said in April that his bank estimates the speed limit is ``just a bit under 3 percent.''
The debate may resurface today as Chairman Ben S. Bernanke and his colleagues gather in Washington to discuss monetary policy, the economy and the Fed's strategy for communicating with the public. The meeting began at 2 p.m. New York time.
Economists surveyed by Bloomberg News unanimously forecast that the Fed will leave its benchmark lending rate at 5.25 percent when the meeting concludes tomorrow. The rate has been unchanged since June, the Fed's longest period of rate inactivity since 1997-98.
The Fed will release its statement on interest rates and the economy tomorrow at about 2:15 p.m. New York time.
The questioning of growth estimates is a reversal of the 1990s, when then-Fed Chairman Alan Greenspan bucked his Ph.D.- laden staff to declare that technological advances were speeding up productivity gains.
Greenspan's Pride
``The Fed and actually Alan Greenspan himself took tremendous pride in spotting this increased trend in productivity,'' said Ethan Harris, the chief U.S. economist at Lehman, who worked at the New York Fed from 1990 to 1996. ``There's a reluctance to make the call that the boom's over. You really don't know for sure until you've had years of data.''
Last year, staff economists led by David Stockton, director of the Research and Statistics division, cut their potential- growth estimate at successive meetings in August and September.
At the last meeting on May 9, after the staff presented a ``slightly'' lower estimate of future productivity, ``many participants commented that their view of potential output growth was somewhat more optimistic than that of the staff,'' according to minutes of the session.
Less Than Half
Growth in workers' output per hour has averaged a 1.5 percent annual rate since the start of last year, less than half the 3.1 percent pace of the five years through 2005.
Fed economists' reduced estimates of potential growth also stem from an anticipated decline in the portion of the population that is either working or looking for jobs.
The so-called labor-force participation rate fell to an average of 66.2 percent the past five years, from 67 percent in the previous five. The rate may fall further as the baby-boom generation retires in coming years.
Some estimates are bleak. At a Boston Fed conference last week, Harvard University economist Dale Jorgenson, who taught Bernanke and advised on his senior thesis, presented findings that the economy's annual growth through 2030 will be 1.6 percent, half the pace of the past four decades.
The outlook for productivity and economic growth ``becomes much less sanguine'' after the coming decade, Jorgenson said in an interview.
Jorgenson said he discussed economic trends such as productivity over dinner with Bernanke in Washington in October. ``He thinks about these issues a lot,'' Jorgenson said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .
Last Updated: June 27, 2007 14:49 EDT
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