continue, although notnecessarily at the pace of recent years. Economic growth will likely be sufficientto generate notableincreases in employment, although any reversal of the decline in labor forceparticipation observed since2001 would tend to hold up the unemployment rate. Core consumer price inflationhas remained low sincethe larger increases posted in the early months of 2004, and long-term inflationexpectations have beensimilarly well contained. With some slack likely remaining in labor and productmarkets at present andwith the indirect effects of higher oil and import prices diminishing, theprospects for inflation staying loware good. A favorable economic outcome is, of course, not assured, but at the mostrecent FOMC meetingthe Committee again assessed the risks to both output and inflation as balanced.The Committee alsoreaffirmed that it is prepared to respond to events as necessary in its pursuit ofprice stability.Monetary Policy, Financial Markets, and the Economy in 2004 and Early 2005In early 2004, against the backdrop of stimulative fiscal and monetary policy,continued rapid growth inproductivity, and supportive financial market conditions, business outlaysappeared to be firmingsignificantly and household spending remained strong. The FOMC became moreconfident that theeconomic expansion was likely gaining traction and that the risk of significantfurther disinflation had beengreatly reduced. In these circumstances, it recognized that a highly accommodativestance for monetarypolicy could not be maintained indefinitely. Nonetheless, the Committee wasconcerned about thepersistently slow pace of hiring and viewed underlying inflation pressures aslikely to remain subdued.Accordingly, the Committee left its target for the federal funds rate unchanged at1 percent at its Januaryand March meetings. However, beginning in January, it modified the language of itspolicy statement togain greater flexibility to tighten policy should circumstances warrant byindicating that monetary policyaccommodation would eventually have to be removed. At the same time, the Committeesuggested that itcould be patient in undertaking such actions.By the time of the May and June FOMC meetings, incoming economic data pointed to abroader and morefirmly established expansion, with continued strength in housing markets andbusiness fixed investment.Also, the employment reports for March, April, and May had indicated strong andwidespread gains inprivate nonfarm payrolls, and previous reports for January and February wererevised upward significantly.Overall consumer price inflation in the first quarter was faster than it had beena year earlier, and coreinflation also increased, in part because of the indirect effects of higher energyprices. The Committee
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