In the 1990's economists identified several stylized facts about the US economy.  The first is that over the past century, the economy has experienced on average, a growth in output per hour of 2% per year.  Productivity growth comprises one half of a second stylized fact; namely that the economy can be thought of as having a natural "speed limit."  More specifically, the US economy can expand as fast as the sum of growth in the productive knowledge base and growth in the population labor force.  The effective "speed limit" was the maximum rate at which the economy could grow without inflation picking up.  At the start of the 1990s, this number was estimated to be around 3%.  Rapid growth in the latter half of the decade brought many economists and politicians to suggest that the economy had entered a new paradigm of more rapid economic growth.  This new economy, spurred by its information technology breakthroughs, could grow much faster they argued.

     While the slowdown stifled talk of some new era of rapid economic growth, recent developments may renew them.  For example, first quarter's rapid productivity release of 8.6% is remarkably large.  The increase is a little bit of a mixed blessing because it represents not only a significant growth in output but a cutback in man hours worked.  In fact, a good deal probably represents what analysts like to call cutting the fat, where companies strip back on both workers and on worker hours.  Nonetheless, the rapid productivity growth will likely do two things in the short-run.  First, if its sustained recovery does occur, many will attribute the brevity of the recession to the so-called new paradigm and likely harp on its merits once again.  A second more sound effect will be the impact that productivity growth should have on profits.  In a time of relatively significant corporate misery, a little lining in the corporate coffers could certainly help.  An end to the windfall in profits would definitely offer a boost to suffering share prices.  The key assumption being that Wall Street hasn't already factored too much profit recovery into its current assessment of prices.  At any rate, a recovering market could bolster feelings of wealth and consumer confidence.  A recovery also means higher interest rates.

    On Tuesday, the Fed took the productivity release, as well as a range of other economic information into consideration in deciding to keep interest rates constant.  In spite of this, there are some signals that it may began to tighten interest rates soon.  First, the Fed changed its bias to one of neutrality between inflation risks and growth prospects, essentially suggesting that the Fed is one step closer to tightening.  Their press released mentioned remaining neutral for the "foreseeable future," though this is a vague answer and I believe the Fed will pounce as soon as we see any signs of inflation.  Even without strong signs of inflation the Fed may raise rates. The Federal Reserve enjoys being precautionary in its movements; it makes sense to act ahead.  By anticipating swings in the business cycle (or in output and inflation for anyone who dislikes that term), the Fed can more effectively limit the scope of economic excesses.  Interest rates tend to be mean reverting.  Stated differently, they tend to not remain high or low for very long periods of time.  Interest rates are historically low at current levels and barring some economic catastrophe will soon be on the rise.