NCPA - National Center for Policy Analysis

Will The Fed's Tight Money Policy Spark A Downturn?

December 11, 2000

The economy is at risk of a slowdown due to high oil prices, rising taxes and higher real interest rates if the Federal Reserve remains too tight for too long, some observers believe. In the past, Fed Chairman Alan Greenspan has maintained a high interest rate policy until a crisis has forced him to relent, which observers fear he will do this time as well before providing the liquidity the economy needs to grow.

When the Fed Open Market Committee meets on December 19th, it has two choices:

  • Hold fast until it sees a rise in the unemployment rate or a decline in energy prices - a move critics believe would increase the risk of another round of monetary turmoil.
  • Shift to a neutral stance, laying the groundwork for a reduction in the Fed Funds rate early in 2001.

The seeds of the current monetary state, observers believe, were planted a year ago when the Fed provided an abundance of cash to the banking system out of a concern over Y2K. The Y2K problem turned out to be no problem at all, of course, so the Fed's action had the effect of increasing the money supply faster than demand, resulting in this year's outbreak of inflation.

Source: Charles W. Kadlec (Seligman Advisors), "Too Tight, Too Long: Will The Fed Wait For Trouble To Act In Favor Of Growth?" Investor's Business Daily, December 11, 2000.


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