The Fed's New Rule Book

For two years, the Federal Reserve has been struggling mightily to fit what has been happening in the U.S. into traditional economic models. Growth was robust, stocks were soaring, job markets were tightening--yet inflation was nowhere to be found. Quarter after quarter, the pattern held. And try as they might, Chairman Alan Greenspan and the Fed's governors couldn't explain it using the old rules. Now, they have simply stopped trying.

Just within the past few weeks, a majority of Fed officials have rallied around a new consensus view: The nation is in the throes of a technology-driven productivity boom that is letting the economy grow faster than once thought possible without setting off growth-strangling price and wage hikes. Sure, unemployment stands at a 29-year low, the U.S. expansion seems inexhaustible, and money supply is growing rapidly. But with inflation well in retreat, these indicators can no longer be read in the same