Monetary policy report to the Congress, February 17, 2001

When the Federal Reserve submitted its previous Monetary Policy Report to the Congress, in July 2000, tentative signs of a moderation in the growth of economic activity were emerging after several quarters of extraordinarily rapid expansion. Indications that the expansion had moderated from its earlier rapid pace gradually accumulated during the summer and into the autumn. For a time, this downshifting of growth seemed to have left the economy expanding at a pace roughly in line with that of its potential. Over the last few months of the year, however, growth slowed even more, although the dimensions of the slowdown were obscured for a time by the usual lags in the receipt of economic data. Spending on business capital, which had been rising rapidly for several years, flattened abruptly in the fourth quarter. Consumers clamped down on their outlays for motor vehicles and other durables, the stocks of which also had climbed to high levels. Manufacturers adjusted production quickly to counter a buildup in inventories. Rising concern about slower growth and worker layoffs contributed to a sharp deterioration of consumer confidence. In response to the accumulating weakness, the Federal Open Market Committee (FOMC) lowered the intended interest rate on federal funds 1/2 percentage point on January 3 of this year. The FOMC lowered the rate again, by the same amount, at its meeting on January 31. ; The less restrictive conditions in financial markets, and the underlying strengths of the economy, should lead to a rebound in economic growth. The most notable of the underlying strengths is the remarkable step-up in the growth of structural productivity since the mid-1990s, which seems to be closely related to the spread of new technologies. The impressive performance of productivity and the accompanying environment of low and stable underlying inflation suggest that the longer-run outlook for the economy is still quite favorable, even though downside risks may remain prominent in the period immediately ahead.