Monday-Morning Quarterbacking
Subject Economic Expansion
Topic Monetary Policy
Key Words Economic Expansion, Recession, Unemployment, Interest Rates, Inflation
News Story

The Federal Reserve and Alan Greenspan were hailed as geniuses. The economic expansion continued for record lengths, productivity growth had accelerated, unemployment was down to 30-year lows without increasing inflation and stock market prices were at record highs. Over the past year, the Fed tried to slow the economy's growth by enacting a number of interest rate hikes. Then things went downhill. Economic growth fell sharply and suddenly. Stock market prices fell precipitously and the Monday-morning quarterbacking started. Had the Fed delayed too long in trying to slow the economy? Had they raised rates when rate hikes were not needed? And, had they been too slow in reacting when the first signs of trouble appeared?

As expected, the criticism started with the decline in U.S. growth. One category of criticism is that the increased interest rate policy that the Fed pursued from June 1999 to May 2000 was unwarranted. Although economic growth had accelerated, inflation was not a problem and, the argument goes, the Fed's response led to the slowdown. Another line of criticism is that the Fed, by championing the new economy and the benefits of investment in technology, helped create the excesses of the expansion.

According to the Fed, the economy really started to take off in the spring of 1999. With economic growth approaching a 7 percent annual rate, business investment at record levels and the unemployment rate falling toward 4 percent, the Fed was convinced that left unchecked, the economy was heading for an inflation-produced bust. If the Fed left interest rates alone, Greenspan argues, it would have created far greater imbalances in the economy. The economy was in need of a correction and if the Fed had moved sooner to lower interest rates, this adjustment process would have been disturbed. Greenspan does not believe that the Fed did anything that was inappropriate.

(Updated May 1, 2001)

1. What are some of the objectives of monetary policy?
2. What are the instruments of monetary policy available to the Fed?
3. What are some of the sources of uncertainty in the implementation and operation of monetary policy?
4. What is a 'soft landing'?
Source John M. Berry, "Did Fed Hit the Brakes Too Hard, Too Late?" The Washington Post, April 22, 2001.

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