Reference no: EM131172271

Beginning in the middle of 1999 and ending in the spring of 2000, the Federal Reserve Board raised the Federal Funds interest rate and its Discount Rate in increments which totaled 1.75 percentage points in order to slow the economy (engineer a "soft-landing"). The Fed was concerned that key economic indicators were showing that this action was needed in order to prevent inflation from reaching unacceptable limits. These increases brought those interest rates up to 6.50 and 6.25 percent respectively. Up until November 2000, the Fed was still biased toward inflation concerns. Then in December 2000, the Fed was suddenly more concerned with an unexpectedly rapid slowdown in the economy and, between January and December of 2001, lowered interest rates eleven times for a total of 4.75 percentage points down to 1.75 for the Federal Funds and 1.50 for the Discount Rate in order to stimulate aggregate demand. On November 6, 2002, the Fed lowered the Federal Funds rate 0.5 percentage point and another 0.25 percentage on June 25, 2003. Consider the state of the U.S. economy just prior to September 11, 2001. At the time, estimates were that GDP grew by only 1.0 percent in the fourth quarter of 2000 and only 1.2 percent in the first quarter and 0.2 percent in the second quarter of 2001. We now know that the first three quarters of 2001 actually showed negative GDP and that a recession started in the first quarter of that year and lasted eight months. In your opinion, did the Fed do the right thing to stabilize prices (contain inflation) by its actions in 1999/2000 or, in the paraphrased words of Steve Forbes, do nothing more than "make a healthy person sick just because he was too healthy" and actually cause a "crash-landing" of our economic growth? In other words, did the Fed's actions actually cause the recession we experienced in 2001?