Business oportunities

The previous example occurred in the middle of what became known as “goldilocks” economics, not too hot and not too cold. It shows an example of a central bank taking early action to choke off inflationary pressures. While inflation remained in check through the 1990s the economy enjoyed one of its longest ever periods of sustained growth. The previous example demonstrated the success of the Fed’s monetary policy at that time. It had a much harder job in the period November 1998 through to July 2003 with the threat of a deflationary recession a real possibility:
November 1998–October 1999. The Fed left the discount rate unchanged through this period. Rates at the long-end star ted to drift up and despite their low nominal level they were relatively high in real terms and suggested rising inflationary expectations.
November 1999–January 2001. Over the course of a year the Fed increased the discount rate by approximately 150 bpts. These hikes continued through the first half of 2000 even though long-term rates had peaked in Januar y and (with the benefit of hindsight) appeared to be heading down. By Januar y 2001 long-term rates had fallen about 150 bpts from the peak and it appeared as though the Fed had overdone its tightening. The yield curve was inver ted in January 2001. This coincided with the bursting of the technology and stock market bubble.
February 2001–December 2001. Over the course of 2001 the Fed continued to cut rates aggressively and by the end of the year had cut nearly 500 bpts in total. At 1.25% the discount rate was at a historic low. Despite these cuts long-run rates continued to fall and by June 2002 had fallen a further 100 bpts. With very mixed signals of the economic outlook the Fed cut a further 50 bpts in November 2002 but these had little visible effect. The shape of the yield curve at the end of July 2003 remained largely unchanged from June 2002. The outlook in July 2003 remained very mixed with risks of a deflationary recession balanced by hopes of a modest recovery.