By the same token, the officials are less concerned by the risk of a slowdown than their counterparts on Wall Street are. Not only do the central bankers expect the economy to grow below its trend rate in the short term; they want it to. That is because a period of below trend growth will help dampen inflationary pressure by increasing the amount of slack in the economy. Fed officials worry that labour markets, in particular, are too tight. In their July forecast the central bankers expected an average unemployment rate of between 4.75% and 5% for the fourth quarter of 2006 and 2007, well above today s 4.5%. Modestly higher joblessness would be welcome. That unemployment has not risen suggests the economy has not slowed much below its trend rate of growth.
If prudence is telling the central bankers to stand pat, so is their optimism. The Fed is not among those who believe that America s unexpectedly deep housing bust will drag the rest of the economy down. In a recent speech Mr Bernanke made it clear that he saw little sign of the housing recession spreading elsewhere. A stream of weak statistics in subsequent days, particularly a report hinting that manufacturing was in recession, suggested that his optimism might be misplaced.
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