Skip to main content Accessibility help
×
Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-19T07:23:43.021Z Has data issue: false hasContentIssue false

17 - Monetary Policy Becomes Expansionary

Published online by Cambridge University Press:  26 May 2010

Robert L. Hetzel
Affiliation:
Federal Reserve Bank of Richmond
Get access

Summary

Credibility allowed the FOMC to run an expansionary monetary policy in response to the international economic crises that started in summer 1997. Expansionary policy appeared initially as strong real growth not inflation.

The Fed's Response to Asia

In 1997, the FOMC debated how to reconcile strength in the economy and a falling unemployment rate with low inflation. At his July 1997 Humphrey–Hawkins testimony, Greenspan talked of a “new paradigm” where technological growth would keep capacity in line with increased demand. However, he added that growth in employment could not indefinitely exceed growth of the labor force. By fall, the unemployment rate had fallen to 4.8%. In October 1997, a hawkish Greenspan (December 1997, 965) warned Congress: “The law of supply and demand has not been repealed. … Short of a marked slowing in the demand for goods and services … the imbalance between the growth in labor demand and expansion of potential labor supply … must eventually erode the current state of inflation quiescence.”

Markets assumed that the FOMC was ready to raise the funds rate. Subsequently, the Asia crisis emerged. Although a rate hike had appeared likely at the November FOMC meeting, stock market volatility intervened. Concern over weakness in Asian equity markets produced a fall of 554 points in the DJIA on October 27, 1997. Added to the declines of the two prior days, the index fell 10.9%. Asia then came to dominate policy.

Type
Chapter
Information
Publisher: Cambridge University Press
Print publication year: 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×