Although the performance of the U.S. economy had been remarkable, Directors noted the contribution of possibly transitory factors and cautioned that there were significant risks. Principal among these is the danger of a substantial and abrupt decline in U.S. equity prices. Directors noted that the strength of demand, including corporate investment as well as household consumption, had been underpinned by the high level of stock prices-a level that was difficult to explain-and they were concerned that a sharp market decline could have significant effects on both domestic and foreign economies. Some Directors were particularly concerned that a decline in equity prices could lead to an abrupt adjustment in the household savings rate, which was now at a historic low. Others were less concerned because they considered that national savings, which had been increasing, was the more relevant concept.
Directors also noted that the sharp widening of the external current account deficit and the appreciation of the dollar had been important-but could not be permanent-factors in allowing rapid domestic demand growth without rekindling inflation. Further, Directors suggested that some other factors that had contributed to favorable wage and inflation performance in recent years, such as lower commodity prices, may also have transitory effects. Any abrupt reversal of these conditions could cause problems for macroeconomic management.
Directors considered that more than the usual uncertainty surrounded current estimates of potential output and the natural rate of unemployment, reducing the usefulness of these indicators as guides for macroeconomic policy. They recognized that strong investment and continued productivity gains had probably raised potential output more rapidly than in preceding periods, but agreed that it was difficult to gauge the respective contributions of underlying productivity performance and transitory factors. Regardless of these uncertainties, however, Directors cautioned that the economy still faced resource constraints, and the recent very strong growth in domestic demand could not be sustained for much longer without having inflationary consequences.
In these circumstances, many Directors considered that, unless there was evidence soon that the strength of demand growth was abating, the authorities should tighten monetary policy further to ensure that the expansion remained on a sustainable noninflationary path. Notwithstanding the inevitable uncertainties about the macroeconomic outlook, these Directors considered that the aforementioned risks to the economic outlook underscored the importance of acting promptly to keep inflationary pressures in check. They emphasized that waiting too long to act would risk having to raise interest rates more sharply later to stem a pickup in inflation, which would increase the likelihood of a sharp stock market correction and a "hard landing". Some other Directors, however, were less inclined to think that an increase in interest rates would be called for in the near future.