well be associated with higher market interest rates, unless domestic saving rebounds. near - term outlook going forward, the members of the federal reserve board and presidents of the federal reserve banks believe there are mechanisms in place that should help to slow the growth of spending to a pace more consistent with that of potential output growth. consumption growth should slow some, if, as seems most likely, outsized gains in share values are not repeated. in that event, businesses may trim their capital spending plans, a tendency that would be reinforced by the higher level of market interest rates that borrowers now face. but with large unexploited long - term profit opportunities stemming from still - burgeoning innovations and falling prices of many capital goods, the typical cyclical retrenchment could be muted. working to offset somewhat this anticipated slowing of the growth of domestic demand, our export markets can be expected to be more buoyant because of the revival in growth in many of our important trading partners. after considering the various forces at work in the near term, most of the federal reserve governors and bank presidents expect the growth rate of real gdp to be between 3½ and 3¾ % over the four quarters of 1999 and 2½ to 3 % in 2000. the unemployment rate is expected to remain in the range of the past eighteen months. inflation, as measured by the four - quarter percent change in the consumer price index, is expected to be 2¼ to 2½ % over the four quarters of this year. cpi increases thus far in 1999 have been greater than the average in 1998, but the governors and bank presidents do not anticipate a further pickup in inflation going forward. an abatement of the recent run - up in energy prices would contribute to such a pattern, but policymakers ’ forecasts also reflect their determination to hold the line on inflation, through policy actions if necessary. the central tendency of their cpi inflation forecasts for 2000 is 2 to 2½ %. pre - emptive policymaking in its deliberations this year, the fomc has had to wrestle with the issue of what policy setting has the capacity to sustain this remarkable expansion, now in its ninth year. for monetary policy to foster maximum sustainable economic growth, it is useful to pre - empt forces of imbalance before they threaten economic stability. but this may not always be possible – the future at times can be too opaque to penetrate. when we can be pre - emptive, we should be,

must also be slowing. because until very recently growth of compensation per hour has been rising, albeit modestly, it follows that productivity growth must have been rising these past five years, as well. accelerating productivity is thus evident in underlying consolidated income statements of nonfinancial corporations, as well as in our more direct, though doubtless partly flawed, measures of output and input. that said, we must also understand the limits to this process of productivity - driven growth. to be sure, the recent acceleration in productivity has provided an offset to our taut labor markets by holding unit costs in check and by adding to the competitive pressures that have contained prices. but once output - per - hour growth stabilizes, even if at a higher rate, any pickup in the growth of nominal compensation per hour will translate directly into a more - rapid rate of increase in unit labor costs, heightening the pressure on firms to raise the prices of the goods and services they sell. thus, should the increments of gains in technology that have fostered productivity slow, any extant pressures in the labor market should ultimately show through to product prices. meanwhile, though, the impressive productivity growth of recent years also has had important implications for the growth of aggregate demand. if productivity is driving up real incomes and profits – and, hence, gross domestic income – then gross domestic product must mirror this rise with some combination of higher sales of motor vehicles, other consumer goods, new homes, capital equipment, and net exports. by themselves, surges in economic growth are not necessarily unsustainable – provided they do not exceed the sum of the rate of growth in the labor force and productivity for a protracted period. however, when productivity is accelerating, it is very difficult to gauge when an economy is in the process of overheating. in such circumstances, assessing conditions in the labor market can be helpful in forming those judgments. employment growth has exceeded the growth in working - age population this past year by almost ½ percentage point. while somewhat less than the spread between these growth rates over much of the past few years, this excess is still large enough to continue the further tightening of labor markets. it implies that real gdp is growing faster than its potential. to an important extent, this excess of the growth of demand over supply owes to the wealth effect as consumers increasingly perceive their capital gains in the stock and housing markets as permanent and, evidently as a consequence, spend part of them, an issue to which i shall return shortly