. why such a sharp slowdown? why did growth fall more sharply than anticipated and what does this tell us about the new economy? sharp slowdowns are often the result of three inter - related and reinforcing developments : a coincidence of adverse shocks, an unwinding of pre - existing imbalances triggered by the deterioration in broader macroeconomic conditions, and a collapse in consumer and business confidence. the economy slowed in part, as i have noted, because monetary policy was committed to such an outcome. by mid - 2000, it appeared that the economy, in response to the cumulative tightening over the previous year, was slowing toward trend. the fed stopped tightening and private forecasters were projecting a " soft landing. " by october and november, it appeared that the slowdown was taking growth modestly below trend. given the supply - side uncertainties i noted earlier, this outcome also seemed acceptable. but late in the year, the economy decelerated more sharply and we now know that growth fell to about 1 percent in the fourth and first quarters and it appears to have remained sluggish into the second quarter. we did not, however, have the data in hand at the time of the december meeting to confirm the degree or persistence of the slowdown. the blue chip consensus forecast in december, for example, still projected 3 percent growth over 2001. the sharper slowdown reflected, in part, the contribution of several additional shocks that reinforced the effect of the monetary policy tightening. energy prices rose throughout 1999 and 2000. oil prices shot up in the fall and natural gas prices soared late last year just as oil prices began to recede. the higher energy prices undermined consumers'purchasing power. as interest rates rose and the economy slowed, lenders became more discriminating about the creditworthiness of borrowers, reflecting concern about borrowers'ability to service all the debt that they had accumulated during the earlier period of exceptional performance. the result was increased interest rates for lower - rated borrowers and tighter underwriting standards at banks. the decline in equity valuations for high - tech firms, the virtual closing of opportunities for initial public offerings, and the higher quality spreads for low - rated borrowers naturally hit start - up and new technology firms especially hard. also, equity prices fell sharply, particularly technology stocks – with the nasdaq now having declined nearly 60 percent and internet stocks about 70 percent from their peaks. this is a perfect example of an unwinding of

full - fledged recession, at least a close relative, a growth recession – as a result of the developments i just described. a growth recession refers to a period of below - trend growth during which the unemployment rate rises. but that misses the distinctive features of the current slowdown. so i think the story is that we turned from a period in which all the forces operating on the economy were lined up to produce exceptionally favorable performance to a period when the economy must adjust to some of the imbalances that built up in the earlier period. our job as monetary policymakers is to try to ensure that the adjustment is not too jarring. but there has been pain. many investors are understandably unhappy at their loss of wealth. so much of what had been accumulated in a few years has quickly disappeared, almost as mysteriously. in addition, many firms have gone bankrupt and others will, especially some of the riskier ventures in the technology sector. but these patterns seem to have historical precedent in the corrections of both equity values and investment that follow, after a lag, the transition to a period of higher productivity growth. some might expect that new - economy developments would make recessions less likely. that is not an entirely unreasonable presumption. the experience among faster - growing european economies in the earlier postwar period was that these economies tended to have fewer quarters of declining output – the sine qua non of a recession as defined in the united states – than was the case in the slower - growing united states. now that the united states had become a higher - growth economy ( again ), it might be that cyclical episodes would be more likely to be growth recessions and less likely to be outright recessions. however, in the united states in the 1950s and 1960s – when average growth rates were about as high as today – the chance of negative - growth quarters was about equal to the chance in the 1970s and 1980s, when average growth was only half as large. in addition, to the extent that the high - tech revolution increased the ability of firms to recognize and respond to changes in demand and quickly remedy unwanted inventory accumulation, the response of output to demand shocks might be less persistent. on the other hand, it appears that the high - tech revolution didn't help firms or other forecasters anticipate changes in demand. there is no guarantee that a higher - growth economy is less vulnerable to recessions. indeed, i believe that the new - economy developments that have raised sustainable growth