Economics Update (April-June 1998)

Fed Governor Meyer Examines
Exceptional Economic Performance

S trong domestic demand, favorable financial conditions and positive supply shocks are the major factors contributing to the exceptional U.S. economic performance of the past few years, asserted Federal Reserve Governor Laurence H. Meyer during a public policy meeting at the Atlanta Fed.

Laurence Meyer,
Federal Reserve Governor
These three factors, along with low inflation brought about by effective monetary policy, have fueled and sustained each other to boost recent economic performance, according to Meyer. Favorable financial conditions have supported the strong demand for goods and services. And favorable shocks — such as the decline in oil prices and import prices, low computer prices due to technological innovations, low food prices, and steady healthcare costs — have enabled businesses to produce at a lower cost.

Rather than attributing the current conditions to a permanent change in the economy's structure, Meyer believes that output is now above a level that is sustainable in the long run and that only favorable supply shocks have prevented an increase in inflation. Nevertheless, he indicated uncertainty about how far above capacity the economy is actually operating. He also noted disagreement on the effects of monetary policy since, while the nominal federal funds rate has remained nearly constant, the decline in inflation has raised the real, or inflation-adjusted, federal funds rate.

Monetary policymakers aim for maximum sustainable growth and maximum sustainable levels of output and employment. To accomplish these goals, Meyer believes it is essential to slow growth from near the 4 percent level experienced in 1997 to below trend for a while to allow the economy to move toward a more sustainable state. The Asian financial crisis, he said, may bring about this slowdown, ruling out monetary tightening that might otherwise be required.

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