It is widely accepted that the Federal Reserve System has, through the years, employed different monetary policy strategies and tactics. For example, it is generally accepted that an emphasis on targeting the reserve aggregates and the money supply in the 1970s and early 1980s ultimately gave way to a strategy of targeting the federal funds rate to either smooth interest rates or stabilize the real sector of the economy. Recently, discussions of “inflation targeting” have become more prevalent.
Moreover, the macroeconomic theories and priorities that inform the Fed’s stabilization policies have similarly evolved and changed. This paper is a case study in monetary policy making focusing on the recession of 2001 and how it affected the Fed’s policies and strategies for the future. The macroeconomic models central to the Fed’s analysis, its priorities relating to price stability versus economic growth, the key economic variables which dominated their discussions (and, ultimately their policy actions), the monetary strategies and tactics employed as a response to the recession of 2001, as well as the economic and political context of the recession are all evaluated with the benefit of several years hindsight.
The “raw material” for this analysis is the official transcripts of the FOMC meetings which took place during the recession of 2001 (along with transcripts which immediately preceded the recession). In 1994, the Federal Reserve System adopted the policy of producing written “transcripts” of its FOMC meetings following each meeting. For the FOMC meetings prior to 1994, no contemporaneous, written transcripts were produced. However, such transcripts were produced later (i.e., from recordings). These transcripts (beginning 1979) are made available to the public after a five-year lag.
Because the “minutes” of the FOMC meetings (which are released three weeks after each meeting) do not generally include the details of the economic and policy debates upon which the Fed’s decisions are based, the actual transcripts represent, potentially, a wealth of information and insight about Federal Reserve policymaking not easily observable from the minutes. As a result, the theoretical and practical value of the transcripts themselves is highly significant.
In particular, this paper focuses on the key economic events and policy debates of 2001 and how they changed and shaped the Fed’s view of the economy for the future. These key debates include the critical role of productivity growth and its impact on inflation (or deflation) pressure. Discussions about the relationship between productivity growth and the real interest rate were also a focal point that were critical to the Fed’s evolving view of the economy and its role in determining money and credit conditions, especially in setting the target federal funds rate. Despite the fact that the recession in 2001 was relatively mild, and, in the view of some not particularly noteworthy, we find that the economic discussions and debates it induced led to a number of subtle, but significant insights that informed the Fed’s future policies