Monetary policy report to the Congress, July 20, 2000 (semi-annual Humphrey-Hawkins report)

The impressive performance of the U.S. economy persisted in the first half of 2000 with economic activity expanding at a rapid pace. Overall rates of inflation were noticeably higher, largely as a result of steep increases in energy prices. The remarkable wave of new technologies and the associated surge in capital investment have continued to boost potential supply and to help contain price pressures at high levels of labor resource use. At the same time, rising productivity growth--working through its effects on wealth and consumption, as well as on investment spending--has been one of the important factors contributing to rapid increases in aggregate demand that have exceeded even the stepped-up increases in potential supply. Under such circumstances, and with the pool of available labor already at an unusually low level, the continued expansion of aggregate demand in excess of the growth in potential supply increasingly threatened to set off greater price pressures. Because price stability is essential to achieving maximum sustainable economic growth, heading off these pressures has been critical to extending the extraordinary performance of the U.S. economy. To promote balance between aggregate demand and potential supply and to contain inflation pressures, the Federal Open Market Committee (FOMC) took additional firming actions this year, raising the benchmark federal funds rate 1 percentage point between February and May.