some offset to the external drag coming from asia and the appreciation of the dollar. the question is when and how much of a slowing results, and whether the slowdown takes growth to or below trend, or leaves growth still above trend. there is still considerable uncertainty about how these crosscurrents will balance out. second, there is a tug of war between the very tight labor market and the set of forces that have been restraining inflation. the forces restraining inflation have been winning this battle to date, and they have been reinforced this year by the sharper - than - expected decline in oil prices, by the even more extraordinary decline in computer prices in recent months, and by the decline in commodity prices and further downward pressure on import prices associated with the crisis in asia. nevertheless, at some point, the favorable supply shocks will dissipate or reverse. [UNK] as the economy entered 1998, continued momentum in private domestic demand was clearly evident, while the drag from asia was less obvious. but there was clear evidence in the trade data among the asian developing economies that a significant swing was under way in their trade balances and there is little doubt that the u. s. economy will bear the greatest burden of this turnaround. the march employment report was the strongest evidence to date that a slowing is under way, although it should be appreciated that there is often more noise than signal in one month ’ s data. and, even with the unexpectedly weak march reading, hours worked advanced at a robust 4. 8 % annual rate in the first quarter. so there is still considerable uncertainty about whether the spillover from asia and the earlier cumulative appreciation of the dollar will slow the expansion to or below trend immediately ahead. in terms of inflation, there is no evidence to date that wage pressures are building, relative to last year, and certainly no evidence of a pickup in inflation, though the recent data for core cpi has hinted that the earlier downward trend may now be behind us. at any rate, it appears likely, given the renewal of favorable supply shocks, that inflation will remain well contained this year. but monetary policy has little ability to affect inflation this year. we should, therefore, be focusing on inflation prospects for next year. as i noted earlier, some upward pressure on inflation is likely going forward as forces retraining inflation dissipate or reverse, though a similar statement would have been in order at this time last year. the expected persistence of the special forces restraining inflation is therefore an important consideration in

an improvement that is generally associated with capital deepening, an increase in the amount of equipment each worker has at its disposal, as a result of the strength of investment in this expansion. as such, this improvement in productivity growth may itself be transitory, part of a one - time increase in the level of productivity associated with a transition to a higher capital - to - labor ratio. nevertheless, even a couple of tenths improvement in productivity growth, if sustained for some period, would give an important boost to higher living standards over time. but this upward adjustment in my estimate of the productivity trend plays only a negligible role in explaining how we have managed such exceptional economic performance over the last couple of years. it goes in the right direction, but it is simply too small to carry much of the burden. the major player in my view, in addition to the decline in nairu, is the coincidence of favorable supply shocks. the relative weights here are very important because they affect the challenge for monetary policy. challenges for monetary policy the challenge for monetary policy, as always, is to sustain the best possible economic performance. the emphasis here is on the “ possible. ” sometimes we are expected to deliver more than what is possible. we aim for maximum sustainable growth and maximum sustainable levels of output and employment. the emphasis here is on “ sustainable. ” trying to do more threatens to introduce unnecessary instability into the economy and ultimately to cut short an expansion that otherwise has the potential to continue for some time. trying to do more threatens to give back some of the reduction in inflation that has moved the u. s. to a position very close to the federal reserve ’ s objective of price stability. the bottom line is that it is essential that growth slow from the near 4 % over 1997 to and perhaps below trend for a while to allow the economy to move toward a more sustainable state. prospects there are two sets of crosscurrents that are likely to shape the outlook immediately ahead. first, there is a tug of war between the continued exceptional momentum in private domestic demand and the external drag from the asian crisis. the latter shock also reinforces the restraint that had been projected from a cumulative appreciation of the dollar that predated the asian crisis. the result should almost certainly be some slowing in the expansion, relative to 1997. still, the sharper - than - expected decline in oil prices, the decline in long - term bond yields and the further rise in equity prices in recent months are providing