constrained from falling could increase as price inflation moves toward or below zero. in these circumstances, the effective clearing of labor markets would be inhibited, with the consequence being higher rates of unemployment. taken together, these considerations suggest that deflation could well be more damaging than inflation to economic growth. while this asymmetry should not be overlooked, several factors limit its significance. in particular, more rapid advances in productivity can make this asymmetry less severe. fast growth of productivity, by buoying expectations of future advances of wages and earnings and thus aggregate demand, enables real interest rates to be higher than would otherwise be the case without restricting economic growth. moreover, to the extent that more - rapid growth of productivity shows through to faster gains in nominal wages, there will be fewer instances in which nominal wages will be pressured to fall. one also should not overstate the difficulties posed for monetary policy by the zero bound on interest rates and nominal wage inflexibility even in the absence of faster productivity growth. the expansion of the monetary base can proceed even if overnight rates are driven to their zero lower bound. the federal reserve has authority to purchase treasury securities of any maturity and indeed already purchases such securities as part of its procedures to keep the overnight rate at its desired level. this authority could be used to lower interest rates at longer maturities. such actions have precedent : between 1942 and 1951, the federal reserve put a ceiling on longer - term treasury yields at 2 - 1 / 2 percent. with respect to potential difficulties in labor markets, results from research remain ambiguous on the extent and persistence of downward rigidity in nominal compensation. clearly, it would be desirable to avoid deflation. but if deflation were to develop, options for an aggressive monetary policy response are available. * * * fortunately, the ability of our economy to weather the many shocks inflicted on it since the spring of 2000 attests to our market system's remarkable resilience. that characteristic is far more evident today than two or three decades ago. there may be numerous causes of this increased resilience. among them, ongoing efforts to liberalize global trade have added flexibility to many aspects of our economy over time. furthermore, a quarter - century of bipartisan deregulation has significantly reduced inflexibilities in our markets for energy, transportation, communication, and financial services. and, of course, the dramatic gains in information technology have markedly improved the ability of businesses to address festering economic imbalances before

closed at the end of last month, the u. s. federal government's budget deficit shrank, as federal tax revenues came in at a greater - than - expected pace. although the final accounting for the fiscal year is yet to be tallied, treasury data indicate that the federal budget deficit was probably equal to about 2 - 1 / 2 percent of gdp - - below its level of about 3 - 1 / 2 percent of gdp in the preceding two years. that said, the budget figures for the fiscal year just ended were little affected by the fiscal policy response to the recent hurricanes. only a small portion of the emergency federal outlays budgeted for hurricane relief were actually spent in september, the last month of the fiscal year. the bulk of the hurricane - related spending and tax relief will show up in the budget accounts in the current and next fiscal years. moreover, the total magnitude of the federal response is still unknown, adding to the uncertainty associated with the fiscal outlook. viewed from a longer - term perspective, the financial position of the u. s. federal budget has oscillated dramatically over the past ten years. ten years ago, the federal budget had a deficit that amounted to about 2 - 1 / 2 percent of gdp, roughly similar to the current percentage, and forecasts at that time pointed to some widening in this budget gap in future years. budget agreements in earlier years - - 1990 and 1993 - - had both raised taxes and reduced spending, and the combination of these actions had helped lower the federal budget deficits from the levels of previous years. these budget agreements demonstrated the desire of policymakers to undertake some hard steps necessary to reduce the deficit. they had also put in place caps on so - called discretionary federal spending - - that is, the portion of federal spending that is allocated annually - - and had required that legislative changes to taxes or entitlement spending be deficit neutral, a requirement called the paygo rule. the paygo rule mandated that changes in taxes or entitlement spending be offset by other changes in taxes or entitlement spending so that the deficit was not increased. despite the enactment of deficit - reducing legislation and the existence of these budget rules, the best estimates ten years ago had the federal budget still running deficits far into the future. however, as it turned out, a number of positive developments pushed the budget into surplus in 1998 through 2001. importantly, bipartisan support in the congress for establishing and maintaining some measure of