a comparison of core inflation over the last couple of years has to be adjusted to account for the methodological revisions to the cpi. to date, bls revisions have lowered inflation cumulatively by around a quarter point over the past two years. the point of the policy action, of course, is to try to prevent any significant increase in core inflation. clearly the recent performance has been extraordinary. i have noted previously that it is not only better than virtually anyone had forecast, it is better than historical regularities would have suggested was possible. the explanations for the continuing decline in core inflation, despite an unemployment rate that in earlier periods would have been associated with rising inflation, include some combination of temporary coincidences and longer - lasting structural changes. first, the labor force has been growing about twice as rapidly as a trend rate based on population growth. it is as if demand is calling forth its own supply. part of the explanation is a rebound from a sharp decline in participation rates over 1995. part reflects a normal cyclical rise in participation rates, delayed in this expansion. a small part could be the early effects of changes in welfare laws and previous state efforts to trim welfare roles. as a result, the recent strength of output growth has not resulted in much of an increase in resource utilization rates. i do not expect labor force growth to continue at its recent rapid rate, though the underlying trend over the next several years may well be augmented by an upward trend in participation rates. the net result is that output growth must slow from recent levels to prevent further increases in utilization rates. second, increased job insecurity appears to have moderated the pace of wage change, relative to what we would have expected at current levels of labor force utilization. it is important to note here that the effects on inflation of an increase in worker insecurity may be only temporary. even with the higher worker insecurity, wages are clearly on a rising trend. third, a slowing in the rise in benefit costs ( primarily via slower increase in health care costs ) has moderated the rise in labor compensation associated with wage pressures. as a result, the rise in compensation and hence labor costs has been muted, compared to the faster pace of wage gains. fourth, declining import prices – directly and indirectly - – have restrained price inflation. some judgment has to be made in any forecast about the persistence of the special forces that have contributed to restrained wage and price change over recent quarters. the least likely to continue to act as a

restraining influence, in my judgment, is health care and therefore benefit costs, based on surveys of prospective health care insurance premiums. given the recent further appreciation of the dollar, import prices may decline further, though the restraining effect on inflation may be less important going forward than it has been over the past year. from an asymmetric directive to preemptive policy : why now? during the period from july of 1996 through february of 1997, monetary policy remained unchanged but operated with an asymmetric directive. utilization rates were high - high enough to suggest some risk of rising inflation, but wage gains - - while trending higher, remained modest and core inflation remained on a downward trend, perhaps due to declining import prices and the slowing of the rise in health care costs. the anxiety associated with high utilization rates was clearly tempered by the excellent performance of core inflation, resulting in a posture of “ watchful waiting. ” the federal reserve remained alert during this period, but on the sidelines. while growth was at times well above my estimate of trend, various factors made it reasonable to expect a slowdown in growth toward trend immediately ahead, suggesting that utilization rates would likely remain within their recent ranges. the asymmetric directive reflected a view that the risks in this environment were asymmetric, that there was a greater risk that inflation would rise in response to the prevailing high utilization rate ( and to still higher utilization rates if growth continued above - trend growth ) than that the economy would slow to below trend growth. the asymmetric policy posture was, therefore, a reflection of concern that our forecast might be wrong and that if it were wrong it was more likely to underestimate inflation going forward. what was different in march, compared to this earlier period? not utilization rates. they were still within the narrow range that had prevailed during this period, though admittedly close to the bottom of that range. not core inflation. if anything, core inflation was lower. no, the difference, from my perspective, was not in the data for utilization rates, wage change, and inflation, but in my forecast of the future path of these variables. the change in the forecast, to be sure, was prompted by incoming data suggesting persistent strength in aggregate demand. instead of projecting a slowing to trend immediately ahead, it now appeared to me that we were in a period of sustained above - trend growth that would push utilization rates higher and, in particular, would push the unemployment rate below its recent range.