Just days before one of his last monetary policy committee meetings, Federal Reserve Board Chairman Alan Greenspan received a gift from the U.S. economy.
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A new government report released this morning shows that the productivity of U.S. workers surged by 4.7 percent in the third quarter, not 4.1 percent as was previously thought.
The higher productivity of the workforce serves as a counterbalance to inflationary pressures brewing in the economy and could mean that despite the strength of the economic expansion, inflation may not be as big a threat as was once thought. Put simply, if the U.S. economy can produce more goods and services with fewer bodies, Fed Chairman Greenspan may not need to slow the economy much more by raising interest rates.
To be sure, Wall Street continues to believe that the Fed will hike the federal funds rate–a key short-term rate that banks charge one another on overnight loans—when it meets next on December 13. But instead of a potential half-point rate hike, many now believe the Fed may find it sufficient to raise the fed funds rate by only a quarter of a percentage point to 4.25 percent.
With recent positive news on the inflation front, that could be the last rate hike in the long and storied career of Fed Chairman Greenspan, who is scheduled to step down on January 31, at which point Ben Bernanke (most recently the head of the President's Council of Economic Advisers) will take over.
This morning's report, issued by the Labor Department, might also mean that Bernanke may not need to raise rates upon assuming office—something his three immediate predecessors all had to do.
For example, the productivity report confirmed that hourly compensation—a key driver of inflation—grew 3.7 percent in the third quarter. In real terms, this means worker salaries continue to grow at a slower pace than the overall rate of consumer inflation. This would imply that wage inflation is not a threat to the economy.
The markets reacted positively to the news this morning by pushing the Dow Jones industrial average up around 40 points early Tuesday to the 10,875 level.
Biz Buzz wraps up the day's market news and offers an agenda of upcoming economic news.
