Fearing that people were hoarding dollars to safeguard against a Y2K crisis, the Fed thought it had to pump more money into circulation. When Y2K turned out to be a grand hoax, the Fed was forced to contract the money supply to suck out of the economy all the excess liquidity it had created a few months before. In any case, the series of interest rate hikes engineered by the Fed has caused a rapid contraction of the money supply, a credit crunch, and several months of deflationary monetary policy. But interest rate cuts alone will not provide sufficient spark to the economy. Because there has been a second severe policy malfunction in the tax area.
Fiscal policy is way too tight .
We're deep into the economic danger zone right now. This tax anchor has to be lifted by enacting a very large and immediate supply-side tax rate cut. The Bush plan provides too little relief in the short term to lift this anchor anytime soon. The economy needs a tax cut now. One other factor has hindered the economy.