NCPA - National Center for Policy Analysis

Did The Federal Reserve Err When It Hiked Interest Rates?

February 1, 2001

Some economists believe the Federal Reserve went too far when it began raising interest rates in mid-1999.

Among the worries which prompted the Fed to increase rates:

  • The skyrocketing stock market of the late 1990s generated what has come to be called the "wealth effect."
  • As Americans saw the value of their homes and stock holdings skyrocket, they went out and bought houses, cars and other things in a spending spree which threatened price stability.
  • Too rapid growth in gross domestic product and low unemployment caused the Fed to fear that inflation would result.

The Fed's response -- in the form of higher rates -- caused the stock market to tumble from its peak last March, with real economic growth also tumbling to just 1.4 percent by the end of the year.

Now the question is how long it will take for the current round of easings to get the U.S. economy back on a growth track.

Source: Bruce Bartlett (National Center for Policy Analysis), "Blame Fed for Downturn," USA Today, February 1, 2001.

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