The remainder of 2001 will propel GDP to an optimal, non-inflationary growth rate around 2.2% for the fourth quarter. Overall economic growth for the year should result just under 2.0%.
Inflation.
Over the course of 2001, inflation has been subdued. The economy's slow growth and strong U.S. dollar have kept a lid on inflationary pressures. Worker productivity has increased as businesses cutback on their work hours. In return, businesses have been able to suppress labor cost. Furthermore, the mild rise in unemployment has dampened wage pressure. In fact, Both the Consumer Price Index and the Producer Price Index are showing no indication of inflation. And, to emphasis the restraint on inflation, the most looming threat of 2000, the price of energy, has declined. Due to the scant risk of inflation, it is expected to grow at a rate of 3.1% while the core CPI (excluding food and energy) is projected to increase by 2.4%.
Looking forward, several economists feel there is a potential danger of rising inflation in 2002. This scenario appears unlikely, as the Fed has only created stimulus when they deemed absolutely necessary. With the Fed making the "soft landing" they have wanted, it does not seem practical that they would blow it with a "bumpy takeoff." As the impending risk of inflation increases along side the rise in business activity, the Fed will surely be there to bump up interest rates as the U.S. achieves a non-inflationary growth rate.
Interest Rates.
2001 has been the most aggressive easing of monetary policy since the early 1980s. With the Federal Reserve trying to jump-start the pace of business activity, they have dropped the short-term cost of money from 6.5% to 3.75%. Many individuals expected to see some improvement by this time; however, our economy has evolved from a heavy manufacturing industry into more of a service industry. With this in mind, it is projected that lag times are longer since it is less clear how Fed actions work their way through the industries.