In the last three years, the economy has expanded at a rate of just over four percent annually, and the most recent three quarters have exceeded five percent. This excess has driven unemployment to very low levels. A level this low causes inflation to increase, as firms offer higher wages in order to attract workers. Meanwhile, high domestic growth has caused the current-account deficit to widen. Early signs of inflation and the rising current account deficit have led Alan Greenspan and the Federal Reserve Board to raise interest rates in a series of small steps beginning last year.
Interest rates are now sufficiently high to begin having the desired effect.
Commercial-bank lending rates are rising, and banks are tightening their standards for granting loans. As a result, credit will become more expensive and more scarce in coming months. Generating a soft landing is tricky because of the lag between the interest rate increase and the point when the data showing the impact on the economy are published. Raising rates too much or too little is a distinct possibility. But the Federal Reserve Board is monitoring the situation very carefully, is aware of the complexities, and will attempt to find the appropriate amount of monetary restraint.