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Economic Quarterly

Fall 2002

The Phases of U.S. Monetary Policy: 1987 to 2001

Marvin Goodfriend

From 1987 to 2001 Federal Reserve interest rate policy achieved a transition from relatively low inflation to virtual price stability. Preemptive policy actions in 1994 secured near full Fed credibility for low inflation. And the Fed became more transparent, immediately announcing changes in its federal funds rate target beginning in 1994. Rising trend productivity growth in the late 1990s helped the economy to grow faster without inflation. Although credibility for low inflation and rising productivity growth benefit the economy greatly, both presented difficult challenges for interest rate policy. Other challenges that significantly influenced policy during the period included three major financial crises and two wars.

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