From the FOMC minutes -- the dissenters:
Mr. Poole dissented because he believed that the sustained increase in
money growth in recent quarters and associated accommodative conditions
in the credit markets pointed to rising inflation. Although faster
productivity growth suggested that trend output growth might be modestly
higher than previously thought, the growth rate of aggregate demand over
the past two years clearly had exceeded the economy's long-run growth
potential. Without a reduction of aggregate demand growth, inflation
would rise. In his view, the Federal Reserve should therefore take prompt
action to reduce money growth to limit the rise in inflation and to avoid
an increase in longer-term inflation expectations, which would tend to
destabilize aggregate employment and financial markets.
Mr. Jordan also noted that the monetary and credit aggregates had
accelerated further from already rapid growth rates in 1997. In his view,
these high growth rates were fueling unsustainably rapid increases of
real estate and other asset prices, and reports of "too much cash chasing
too few deals" were becoming more frequent. Anticipated gains on both
real and financial investments had risen relative to the cost of borrowed
funds. In these circumstances, it was increasingly likely that the
Committee would face a choice between smaller increases in interest rates
sooner versus larger increases later. He added that maximum sustainable
economic growth occurs when businesses and households act on the
assumption that the dollar will maintain its value over time, and nothing
he had heard from consumer groups, bankers, or other business people in
his District led him to believe that decisions were being made in the
expectation that the purchasing power of the dollar would be stable.
Furthermore, expectations that market values of income-producing
investments would continuously rise relative to underlying earning
streams were not consistent with a stable purchasing power of money. He
also believed that the view that real interest rates currently were high
was not confirmed by observed behavior. Bankers told him that both
consumers and businesses believed that credit was cheap and plentiful.
These potentially inflationary conditions and imbalances in the economy
were not conducive to sustained maximum growth. |
