Real growth accelerated to 4 percent per year, well above its previous trend. The unemployment rate dropped below 5 percent and continued to fall steadily. Underlying all of this was a marked acceleration in the growth of productivity, which permitted higher growth and the virtual absence of price and wage pressures. Seeing these developments, the Fed did not raise interest rates, allowing the positive impact of a surge in productivity growth to play out, even as the economy blew past economists' conventional thresholds for sustainable output growth and unemployment. Recognizing the warning signs of higher inflation, the Fed began to progressively tighten monetary policy.
Recent data suggest lower growth for the fourth quarter.
I'll add as a personal note that I joined the Fed in July of 2000, just about when this growth slowdown began. As I talked to people in the business and banking communities in the early fall, I could see the slowdown unfolding. In its basic features, the economy had many of the attributes of a textbook slowdown. First came the word that fewer new construction projects were coming into the pipeline. Manufacturers of big-ticket consumer goods saw softening demand for their products.