WASHINGTON — Federal Reserve officials worried throughout 1999 about the soaring stock market even as they began raising interest rates in a series of moves that contributed to the market’s steep plunge in 2000, according to transcripts of their private meetings released Friday.
The transcripts of the eight closed-door meetings of Federal Open Market Committee, the group of Fed board members and bank presidents who set interest rates, showed a group of policy-makers who were keeping a wary eye on Wall Street throughout 1999.
The market was soaring to record heights that year only to come crashing down in 2000 as the Internet stock market bubble burst, wiping out trillions of dollars of wealth on paper and helping to push the country into the 2001 recession.
At the March 1999 Fed meeting, Alice Rivlin worried about threats to the record-long economic expansion. “There is the risk that the stock market’s apparently unwarranted continued upward price march may accelerate again to even more bubbly heights, leading to a devastating crash when the bubble bursts,” she said.
At the group’s first meeting of the year in February, the Fed staff presented a worst-case scenario of what might happen to the economy if stock prices plunged by 40 percent. Greenspan suggested that the Fed’s economic model was probably showing impacts that were more “restrained” in such areas as unemployment than would actually occur from such a sharp drop in stock prices. He questioned the Fed’s projection that unemployment would rise only to 5 percent.
“If someone were to say that a bust in stock market prices would leave us with 5 percent unemployment and an inflation rate of 2.5 percent, some might say ‘Bring it on!”’, Greenspan joked to the committee, noting that five years earlier an unemployment rate of 5 percent would have been considered great.
“Were these types of shocks to occur, I suspect the end results would be quite different,” he said.
After the market crash, the recession and terrorist attacks of 2001, and an extended period of job losses, unemployment peaked at 6.3 percent in the summer of 2003. The government reported Friday that the rate rose to 5.4 percent in February, partly reflecting a return of disappointed job seekers to the labor market now that it is rebounding.
The 1999 transcripts showed various Fed officials worrying throughout the year about the effect higher interest rates would have on Wall Street. The Fed raised rates three times that year, boosting its target for the federal funds rate, the interest that banks charge each other, to 5.25 percent by the end of the year, up from 4.75 percent where it stood before the rate hikes began.
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