The money mandarins of the Federal Reserve Board meet next week to decide on monetary policy. With the economy moderating, the consensus on Wall Street is that the central bankers will vote to stay the course--no rate hike for now. Yet the Fed should go farther than do nothing. It should openly welcome faster economic growth.

Think about it. Over the past four quarters, productivity has hit a phenomenal 5%. The only other periods with such strong productivity gains were recorded early in a business cycle upturn, not in the tenth year of an economic expansion. What's more, prices are remarkably stable, despite months of ominous warnings about the inflationary impact of higher oil prices and rising wages. Put it this way: The unemployment rate is 4%, help-wanted signs are everywhere, worker compensation is rising, yet thanks to strong productivity growth overall labor costs are down.

Inflation isn't a threat so long as the productivity improvements last. And a strong economy encourages management and entrepreneurs to invest huge sums in high-tech gear, restructure their operations around the Internet, and expand overseas--all vital contributors to the productivity revival. The Fed should let the economy go and stop worrying so much about inflation.

 


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