Academic journal article Federal Reserve Bank of St. Louis Review

The FOMC in 1991: An Elusive Recovery

Academic journal article Federal Reserve Bank of St. Louis Review

The FOMC in 1991: An Elusive Recovery

Article excerpt

As 1991 Began, the U.S. economy was in the second quarter of a downturn in aggregate economic activity. Real output, as measured by the gross national product (real GNP), had fallen in the fourth quarter of 1990 at a 2.5 percent annual rate; the first quarter of 1991 would turn out to be even worse, with output falling at a 2.8 percent annual rate. As the year wore on, the pace of real output growth turned positive, although it seemed to stall somewhat toward the fourth quarter. The recession and the subsequent slow recovery put pressure on the primary policymaking group of the Federal Reserve, the Federal Open Market Committee (FOMC), to take action to spur greater output growth in the short term.(1) This paper provides a chronologically based assessment of the Committee's policymaking in this environment. As such, it provides a case study in the making of monetary policy during the recovery phase of the business cycle.

In order to put FOMC decision making into context, a framework for discussion is outlined. The framework is intended to provide a basis for thinking about how monetary policy is made and why, in a broad brush sense, certain concerns reign paramount in Committee deliberations. The framework is meant to be qualitative and suggestive, so as not to belabor the technical details of theoretical arguments.

Generally speaking, the FOMC has well-defined goals but faces two daunting uncertainties when making decisions. One is that the immediate past, current and future path of real output is not easily surmised by considering current data. This inhibits the Committee's ability to assess the state of the economy in a timely fashion and, thus, to make short-run policy decisions. Secondly, the Committee has a difficult time assessing its own policy stance at a point in time, primarily because alternative measures of policy actions sometimes send conflicting signals.

The next section provides the framework for understanding FOMC decision making. The chronology is presented in the subsequent section. The final section provides summary comments.



To understand the FOMC's decision making in 1991, a general framework or reference point is useful in order to put into focus the arguments presented for various policy actions. For the most part, FOMC members and the Board staff, the primary participants in these meetings, present broad points of view and avoid technicalities. Disagreement, when it occurs, is often a matter of the interpretation of recent economic developments, but sometimes concerns the amount of weight to attach to certain broadly theoretical arguments. Before beginning an analysis of Committee deliberations, it is therefore helpful to consider, in a nontechnical way, the ideas that underlie Committee debate. A framework of this sort was presented in Bullard (1990), and this section briefly describes that approach.

FOMC Monetary Policy Objectives

The Committee states its goals for monetary policy repeatedly in documents released to the public throughout the year. In particular, at the conclusion of each meeting, the Committee issues a directive which contains, with other information, a statement of the following type:

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability, promote a resumption of sustainable growth in output, and contribute to an improved pattern of international transactions.(2)

This statement of objectives has three parts. The first goal, to foster price stability, is based on the idea that FOMC policy, over long periods of time, can influence the inflation rate. The second objective, to promote sustainable growth, is associated with the idea of countercyclical monetary policy, in particular that the FOMC can influence real output over short time horizons, say, less than a year.(3) The third part of the statement of objectives, an improved pattern of international transactions, is more oblique, and beginning about midyear, this phrase was dropped from the Committee's statement. …

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