Chairman Greenspan’s testimony

2. In his congressional testimony on the Federal Reserve’s Semiannual Report on Monetary Policy on July 20, Chairman Greenspan observed that growth in household spending had slowed noticeably in recent months. This suggested that the pace of aggregate demand growth may be moving closer in line with the rate of increase in the economy’s productive potential. He noted that a number of accompanying developments suggested that this spending slowdown could persist; however, it was premature to make a definitive assessment. Mr. Greenspan indicated that, while signs of slower growth were evident and had justified not raising interest rates at the last FOMC meeting, these signs were not sufficiently compelling to alter the Committee’s view that the risks remained more on the side of higher inflation.

3. Mr. Greenspan voiced continuing concerns regarding the tightness of labor markets and the potential for wage demands to begin to exceed increases in productivity. He also noted that the increase in core inflation in 2000 may largely reflect indirect effects of higher energy prices. Although energy price changes represented a one-time shift in a set of key prices, by themselves these generally could not fuel persistent inflation. The key to whether higher energy prices could result in persistent inflationary effects was in the response of inflation expectations. Mr. Greenspan pointed out that both survey evidence and rates on the Treasury’s inflation-indexed bonds suggested that inflation expectations had not been affected by increases in energy prices.

4. Mr. Greenspan indicated that a central question underpinning the longer-term economic outlook was the extent to which a more subdued pace of production and consumer spending might be associated with a productivity slowdown. He said that the behavior of productivity as growth slowed to a more sustainable pace would be a revealing test of the extent to which rapid productivity growth in recent years has reflected structural versus cyclical factors. So far, there had been little evidence to undermine the belief that most of the productivity rise had been structural and, indeed, that structural productivity could still be accelerating.

5. Mr. Greenspan’s remarks were considered by markets to be in line with expectations. Following the Chairman’s remarks both stock and bond prices rose modestly.

CBO’s budget outlook

6. The CBO released The Budget and Economic Outlook: An Update on July 18, 2000. The CBO’s budget assessment is more favorable than that presented in April, mainly owing to higher revenue estimates arising from stronger projected economic growth. The CBO now projects that under current policies the unified federal budget surplus will be $232 billion (2.4 percent of GDP) in FY 2000, and will reach $685 billion (4.4 percent of GDP) in FY 2010; these projected surpluses are also somewhat higher than those projected by the Administration in the Mid-Session Review principally because of more favorable economic assumptions. Over the period FY 2001–10, the CBO projects cumulative on-budget surpluses under current policies of $2.2 trillion; off-budget surpluses (principally Social Security) would total $2.4 trillion.

Recent economic data

7. The unemployment rate fell slightly in June to 4.0 percent from 4.1 percent in May. Total nonfarm payroll employment edged up by just 11,000 jobs in June; job growth so far this year has averaged 177,000 per month compared to 202,000 in 1999. The core CPI rose by 0.2 percent in June, and by an annual rate of 2.0 percent in the second quarter of the year compared to 3.2 percent in the first quarter of 2000. The core PPI fell 0.1 percent in June, rising by an annual rate of 0.8 percent in the second quarter compared to a 1.1 percent annual rate in the first quarter of the year.