of real economic activity this is, of course, a most desirable development at this stage. there are a number of reasons why any deliberate actions taken by the monetary authorities to relax monetary policy should be implemented with caution. firstly, not all problems in the international markets have been resolved. the world is still holding its breath on the vulnerable situation of the japanese banking and financial systems ; brazil is still lingering on the edge of a dangerous cliff with its international financial relations ; weaknesses recently surfaced in the financial markets of a few industrial centres ; and the secondary effects of the financial market crisis are only gradually filtering through in the form of a decline in global real economic growth. secondly, the recent financial turmoil left the south african scene with a few additional scars that need time to heal. the depreciation of the rand forced inflation to a higher level and even more out of line with the rest of the world ; the weakening of the current account of the balance of payments in the third quarter provides a further warning for caution ; a monetary stimulation may easily increase demand without increasing production ; and the continuing low level of the country ’ s official foreign reserves do not provide much scope for manoeuvring unless large foreign capital inflows will again supplement the supply of foreign exchange. structural deficiencies in the south african economy that restrict the country ’ s economic growth potential to a relatively low level place an almost permanent obligation on monetary policy to remain relatively restrictive. a relaxation of monetary policy would normally stimulate demand and, unless production responds flexibly and quickly to increases in expenditure, monetary stimulation is inclined to lead either to an unsustainable overall balance of payments deficit and / or an unacceptably high rate of inflation. the monetary policy targets in the government ’ s strategy for growth, employment and redistribution ( gear ) cannot be achieved unless all the other goals for structural adjustment are also achieved at the same time. in view of the depressed real economic situation in the country at this stage, there is, however, some room for a responsible relaxation of monetary policy, provided the international and domestic financial conditions continue to improve further. the reserve bank will move cautiously with and not against any improvement in the underlying conditions, and will allow market forces to exert normal pressures on important prices such as the exchange rate and domestic interest rates.

will need to be alert to the risks that high levels of resource utilization may put upward pressure on inflation. moreover, energy prices may pose a challenge to containing inflation. energy price changes represent a one - time shift in a set of important prices, but by themselves generally cannot drive an ongoing inflation process. the key to whether such a process could get under way is inflation expectations. to date, survey evidence, as well as readings from the treasury ’ s inflation - indexed securities, suggests that households and investors do not view the current energy price surge as affecting longer - term inflation. but any deterioration in such expectations would pose a risk to the economic outlook. as the financing requirements for our ever - rising capital investment needs mounted in recent years - beyond forthcoming domestic saving - real long - term interest rates rose to address this gap. we at the federal reserve, responding to the same economic forces, have moved the overnight federal funds rate up 1¾ percentage points over the past year. to have held to the federal funds rate of june 1999 would have required a massive increase in liquidity that would presumably have underwritten an acceleration of prices and, hence, an eventual curbing of economic growth. by our meeting this june, the appraisal of all the foregoing issues led the federal open market committee to conclude that, while some signs of slower growth were evident and justified standing pat at least for the time being, they were not sufficiently compelling to alter our view that the risks remained more on the side of higher inflation. as indicated in their forecasts, fomc members and nonvoting presidents expect that the long period of continuous economic expansion will be extended over the next year and one - half, but with growth at a somewhat slower pace than over the past several years. for the current year, the central tendency of board members ’ and reserve bank presidents ’ forecasts is for real gdp to increase 4 to 4½ percent, suggesting a noticeable deceleration over the second half of 2000 from its likely pace over the first half. the unemployment rate is projected to remain close to 4 percent. this outlook is a little stronger than anticipated last february, no doubt owing primarily to the unexpectedly strong jump in output in the first quarter. mainly reflecting higher prices of energy products than had been foreseen, the central tendency for inflation this year in prices for personal consumption expenditures also has been revised up somewhat, to the vicinity of 2½ to 2¾ percent. given the firmer financial conditions that have developed over