energy prices and faster increases in the productivity of workers in recent years that, all else being equal, would tend to push up the rate of wage inflation. the fact that compensation gains did not rise under these circumstances suggests that slack in markets provided a countervailing influence, and the utilization of labor could increase at least a little more without creating extensive shortages that would prompt ever - increasing rates of growth of compensation and prices. the amount of labor available to be put back to work as the economy expands is determined not only by the demand for labor but also by the response of its supply. in this regard, we are struggling to understand a major surprise. despite the recent improvements in job prospects, the percentage of the population either working or looking for work - that is the labor force participation rate - has not yet risen from its recessionary lows. apparently, the demand for workers has been strong enough to allow many of those actively looking for jobs to find them but not strong enough to pull people back into the labor force who may have dropped out - perhaps for early retirement or additional schooling. also, some of the trends that we had been seeing for some time - such as the rising participation rate of women - may have recently downshifted, irrespective of the strength of labor demand. the unusual behavior of labor force participation will present a challenge to policymakers. if the workers who dropped out of the labor force during the recession begin returning to it in substantial numbers over the coming year, then considerable gains in output and employment will be associated with little further tightening of the labor market and limited pressures on costs and prices. if, in contrast, the labor market attachment of those out of the labor force is weak, then they will be less likely to seek jobs, which will mean that robust gains in output and employment could be associated with greater scarcity and an appreciable step - up in labor cost pressures. the productivity of labor is another source of uncertainty about how fast the economy can grow on a sustained basis. however, swings in productivity growth are extremely difficult to predict. productivity growth was very strong through the first half of last year, partly because of delayed efficiency gains from the capital goods boom of the 1990s. one implication of these productivity gains was that, for much of the current expansion, businesses were able to meet increasing sales with management efficiencies rather than with a large number of new hires. another implication was that unit labor costs of businesses fell, even as the economy

to help keep interest rates low. a number of factors have contributed to the unusually low long - term interest rates that we have seen, but one of them has been the changing attitude of savers toward risk. 2 economic growth has been relatively steady at a moderate pace, and inflation, although higher, is expected to remain fairly low. as people have become increasingly confident that good economic performance will last for a while, they have asked for less extra compensation for taking the risks of lending for longer periods and to borrowers whose odds on default are usually viewed as high. these changing attitudes have helped produce an unusual phenomenon - the failure of longer - term interest rates to move higher in an expanding economy with rising short - term interest rates ; for many businesses, longer - term borrowing costs have actually fallen since last summer. in this environment, the economy is likely to remain on a path of solid growth, strong enough to continue to gradually reduce unemployment and raise operating rates in industry for a while. perhaps the logical question, given my description of favorable changes in confidence and financial conditions, is why " gradually " and only " for a while " - why not a much more rapid rate of expansion that will raise employment and production more quickly than we have experienced so far this expansion? the answer is that several forces seem to be leaning the other way, and will tend to restrain spending growth going forward. over the near - term, increases in energy prices are siphoning purchasing power of both households and businesses to suppliers overseas, leaving less for non - energy goods and services produced here at home. how large that effect will be is hard to predict. the rise in energy prices last year seems to have damped spending to a limited extent. but the persistence of higher prices may have a cumulating effect on spending, early hints of which might now be showing up in the latest reading on retail sales. in the housing market, prices are unlikely to fall on a national basis, but the increases well above the rise in rents and incomes that we have seen in recent years cannot continue indefinitely, and rising interest rates will probably damp these increases even more. home building should cool a bit as a result, but perhaps more consequentially, as capital gains on housing slow, households will likely turn to reducing the growth of their consumption out of current income as a way of building assets to finance their children's education, their retirement, and so forth. finally, economic policy is becoming less expansionary. after the