For all the finely tuned balance of his Senate Banking Committee appearance today, Alan Greenspan finally tipped his hand in response to a query from Senator Connie Mack just before the hearing’s conclusion. Does Greenspan accept the views of “some,” Mack asked, that maintaining price stability requires pushing the unemployment rate up to 5%, in keeping with “NAIRU” doctrine? The evidence supporting such a conclusion, Greenspan responded, is “unpersuasive.” And while the concept of a “Non-Accelerating Inflation Rate of Unemployment” has had some value as a statistical tool in rationalizing historical data, NAIRU is “probably going to fail as a useful indicator,” he added.  Moreover, in answer to Mack’s question about whether price stability is consistent with an unemployment rate of 4%, Greenspan said he “suspects the answer is yes.”        

The exchange provides the clearest indication yet that NAIRU/Phillips Curve advocate Laurence Meyer is at last being eclipsed within the Fed’s policymaking councils.  Particularly notable was the absence of a rhetorical hedge or reservation in Greenspan’s response. On earlier occasions during this rate-hiking cycle, Greenspan has expressed doubt about theorized statistical regularities between inflation and unemployment. But he would temper such skepticism by emphasizing that there was still a point beyond which a tightening labor market would necessarily feed inflation pressures. The lack of such a hedge in his exchange with Mack today is probably no oversight, indicating that Greenspan saw no need to cover his Meyer flank. Greenspan appears to have a consensus for remaining on hold, at least for now.

Signs of that consensus were visible as well in the forecasts of inflation and unemployment included in the report accompanying Greenspan’s written testimony. The “central tendency” of FOMC members for personal consumption expenditures (PCE) inflation is 2 - 2.5% next year, down from a 2.5-2.75% tendency this year. The FOMC members also have a 4 - 4.25% central tendency for unemployment in 2001, essentially unchanged from the estimate of “about 4%” for this year. In other words, policymakers expect the PCE deflator to drop a notch even as labor market conditions remain tight, which also suggests they see little need for additional rate hikes. Nevertheless, it would probably be premature to give the “all clear” just yet. A stronger-than-expected second quarter GDP report next week, or an “unfriendly” employment report in two weeks, could turn the issue again. Still, looking somewhat further out, it’s also possible to see conditions developing under which the Fed would not only be refraining from further rate hikes, but could shift to an easing stance. To the extent that consumption and borrowing decisions were brought forward in the first and second quarters by expectations of higher rates ahead, a reversal of that influence -- postponing spending -- could contribute to an even sharper slowdown than now seems evident.