the potential for abrupt acceleration of nominal hourly compensation is surely greater. still, a strong signal of inflation pressures building because of compensation increases markedly in excess of productivity gains has not yet clearly emerged in this expansion. among nonfinancial corporations, our most reliable source of consolidated - 4costs, trends in costs seem to have accelerated from their lows, but the rates of increase in both unit labor costs and total unit costs are still quite low. nonetheless, as i have noted in previous appearances before congress, i remain concerned that economic growth will run into constraints as the reservoir of unemployed people available to work is drawn down. the annual increase in the working - age population ( from 16 to 64 years of age ), including immigrants, has been approximately 1 percent a year in recent years. yet employment, measured by the count of persons who are working rather than by the count of jobs, has been rising 2 percent a year since 1995 despite the acceleration in the growth of output per hour. the gap between employment growth and population growth, amounting to about 1. 2 million a year on average, has been made up, in part, by a decline in the number of individuals who are counted as unemployed - those persons who are actively seeking work - - of approximately 700, 000 a year, on average, since the end of 1995. the remainder of the gap has reflected a rise in labor force participation that can be traced to a decline of more than 500, 000 a year in the number of individuals ( age 16 to 64 ) wanting a job but not actively seeking one. presumably, many of the persons who once were in this group have more recently become active and successful job - seekers as the economy has strengthened, thereby preventing a still sharper drop in the official unemployment rate. in may, the number of persons aged 16 to 64 who wanted to work but who did not have jobs was 9. 7 million on a seasonally adjusted basis, slightly more than 5½ percent of the working - age population. this percentage is a record low for the series, which first became available in 1970. the gap between the growth in employment and that of the working - age population will inevitably close. what is crucial to sustaining this unprecedented period of prosperity is whether that closing occurs in a disruptive or gradual, balanced manner. the effects of the crisis in asia will almost certainly damp net exports further, potentially moderating the growth of domestic production and hence employment. the strength of domestic spending that has been bo

##mediaries – through which the effects of monetary policy flow to the real economy – find themselves at a crossroads. starting in august, my fellow fed policymakers and i persistently subjected ourselves to the age - old dialectic in determining the breadth and depth of our policy response : what do we know? what do we think we know – that is, what do we suspect? what can't we know? and, perhaps most important, in light of various forms of uncertainty : what should we do about it? the more we asked ourselves these questions during this period of extraordinary tumult, the more we recognized the need to broaden our policy response beyond monetary policy's blunt traditional tool. changes in the policy rate affect many sectors, not just those that seem out the opinions i am expressing are my own and do not necessarily correspond with those of my colleagues on the board of governors or the federal open market committee. nellie liang and dave reifschneider, of the federal reserve board's staff, provided valuable contributions to these remarks. milton friedman ( 1968 ), " the role of monetary policy ", american economic review, vol. 58 ( march ), pp. 117 ; edmund s. phelps ( 2008 ), " our uncertain economy ", wall street journal, march 14. of balance. charlie munger, the under - heralded partner of the " oracle of omaha, " warren buffett ( perhaps comprising the finest investment team of the last half - century ), believes that economics remains a rather insular field of practice. he seems to delight in accusing the economics profession of suffering from " man with a hammer syndrome. " he recounts, " [ t ] o the man with only a hammer, every problem looks pretty much like a nail. " 3 i suspect munger feels similarly about the orthodoxy of monetary policy. consistent with munger's admonition, the fed saw it necessary to expand our toolkit beyond the proverbial hammer of the policy rate in the last nine months. and as i discussed in remarks last month, the fed's nontraditional policy response included the use of innovative liquidity tools to counter the market turmoil and improve the functioning of financial and credit markets. 4 in my remarks today, i would like to discuss the use of the hammer – the setting of the federal funds rate – particularly in extraordinary times. of course, determining the proper level of the federal funds rate is rarely simple, given typical imprecision on