We're probably near a peak in the business cycle, in other words. For the rest of the year, the rate of growth will be heading down, and no one can be sure how steep the decline will be. Greenspan doesn't want to trigger a recession, of course. The problem is that in economics, smooth transitions and careful adjustments mainly happen in the textbooks. In real life, policymakers almost always overshoot or undershoot their targets.
Economists say the normal lag for monetary policy to take effect is about six months.
That means this month's Fed rate increases will really bite into the economy by September and October. And if the financial markets continue their recent slide, the effects could be quicker and sharper. Because monetary policy is not a precise science, there is an opportunity for the Fed to make a mistake. . . . In that case, the effect might be a new spiral of inflation. Assume Greenspan's objective is to slow economic growth to half its current rate during the fourth quarter.