The economy eventually rebounds when the Fed lowers rates markedly. The Market Stocks trend downward, further shaking consumers' confidence and exacerbating the market downturn. But stocks begin to climb slowly by summer as investors look ahead to an eventual recovery. The government turns to fiscal spending but fails to stimulate the private sector. Foreign investors lose faith in the dollar, causing the currency to plummet and raising the cost of imports.
Stagflation sets in.
With prices rising, the Fed is afraid to cut rates enough to get the economy moving. The Market Stocks slump as investors begin to fear that the U.S. may be catching the stagnation disease that has plagued Japan. Every rally is quickly extinguished by a wave of selling. The McGraw-Hill Companies Inc. All rights reserved.