The Federal Reserve has now released the transcripts for each of the meetings of the Federal Open Market Committee in 2000, a year I remember as, um, interesting. Greg Ip reports in the Wall Street Journal (page A2 of the print edition):
Federal Reserve officials remained bullish on technology spending through most of 2000 even as a massive bust got under way, and may have delayed easing monetary policy for fear of reinflating stock and bond markets, newly released transcripts show...
In June 2000, then-Fed Chairman Alan Greenspan acknowledged that the economy had begun to slow, but from an unsustainable pace.
That August, David Stockton, the Fed's research director, said there was little sign of "an appreciable dent in the demand for equipment and software. It just doesn't look like this boom is about to dissipate any time soon."
In retrospect, a multiyear tech boom peaked at about that time. Business equipment spending grew at double digits in the second quarter of 2000, then screeched to a halt in the third. It was the first of eight quarters of negligible growth, or declines, in equipment spending. That slump was the main cause of the recession that ran from March to November of 2001...
According to the transcripts, Mr. Greenspan wasn't worried. "There is nothing terribly significant going on in the economy excluding energy," he said.
The Fed had last raised short-term rates in May, to 6.5%. Thereafter, the "balance of risks" in its post-meeting statements were tilted to risks of inflation, suggesting a rate increase was more likely than a rate cut. But even as a slowdown became apparent, officials were reluctant to change that. They thought tight labor markets and high energy prices threatened to raise inflation...
That December, Mr. Greenspan acknowledged that growth had "unambiguously moved down dramatically." A few weeks later, the Fed began to cut rates.
Over the course of the year, the data was nothing if not confusing. A rough history of what we knew, and when we knew it:
In retrospect, things turned sour in the second half of the year. But that followed a quite robust second quarter, and the magnitude of the weakness in the third quarter was not fully apparent until well into the fourth quarter. (Remember that the advance estimates roughly reflect what was known in real time. The final estimates don't arrive until about three months after the fact reflect after-the-fact calculations up through the 2003 benchmark revisions.) What made the read even more difficult was the fact that consumption spending -- presaging a pattern that would persist (surprisingly) through the 2001 recession and beyond -- was holding up nicely even as investment tanked.
In the meantime, the inflationary picture was looking anything but benign:
How might we learn from this experience? Beats me. Is it possible that, in failing to accurately read what was happening in the economy the FOMC held the federal funds rate too high for too long? Sure. But nobody that I know of has demonstrated the skill required to reliably call business cycle turning points. Furthermore, I simply do not believe that monetary policy had much, if anything, to do with the boom in equity markets , and I do not believe that monetary policy could have done much, if anything, about the consequences of the bust (including the after-effects of the run-up in equipment and software investment driven by Y2K). And none of what we now know about the difficulties to come washes away what still appear to be legitimate concerns that inflationary pressures might stick.
I had my own small role in the policy process that year and, like my many others, I blew the call. I did not see what was happening until late -- very late -- in the game. With the benefit of hindsight, I have thought long and hard about what we might have done differently. But there, I'm afraid, I'm at a bit of a loss.
UPDATE: Mark Thoma has Greg Ip's report on the inflation targeting debate of 2000, such as it was.