With the U.S. economy estimated to be operating at a very high level of resource utilization, Directors noted that a key to successful policy in the period immediately ahead was to gauge the underlying strength of the U.S. economy. In these circumstances, preventing the emergence of inflationary pressures would depend critically on aggregate demand growing at a rate more in line with the economy's productive capacity. Directors believed that, despite the uncertainties associated with the effects of the Asian crisis, given recent inflation performance, the strong fiscal consolidation in recent years, and the prospects for a moderation in aggregate demand growth during 1998, the balance of risks suggested that the current stance of monetary policy was appropriate for the time being.
Directors cautioned, however, that other considerations warranted that the authorities remain vigilant in the period ahead. They noted that, in the absence of further adverse economic shocks from Asia and the rest of the world, labor market conditions were expected to remain tight in the United States, and the influence of factors that had restrained inflation was likely to wane. Directors also noted that asset prices and monetary and credit aggregates had posted strong gains recently. Under these circumstances, many Directors noted that a tightening of monetary policies could well be needed in the period ahead to safeguard hard-won gains against inflation and inflationary expectations, and to guard against a potential later major correction in equity markets and its adverse effects on the U.S. economy and financial markets abroad. Accordingly, they advocated an early monetary policy response should it become warranted.
Directors recognized that monetary tightening in the United States could have substantial effects on the currently sensitive global financial markets, which could in turn feed back to U.S. financial markets, and that such interlinkages complicated the formulation of U.S. monetary policy. While noting the importance of taking into account such interlinkages in policy formulation, Directors generally agreed that the United States could make the best contribution to the world economy by managing its monetary policy with a view to achieving price stability and maximum sustainable growth in the United States. A few Directors considered that if a further significant weakening of economic conditions in the rest of the world should dampen U.S. economic activity, a loosening of monetary policy could not be ruled out.