What the FOMC transcripts reveal about the monetary policy easing episode from July 1995 to January 1996

The 1994–95 monetary tightening episode was a classic example of a pre-emptive monetary policy tightening to combat emerging price pressures. This episode was followed shortly thereafter, over the second half of 1995 into early 1996, by a pre-emptive easing of monetary policy to counter the emerging threat of a weaker pace of economic activity. These two episodes largely adhered to the risk management playbook used by Chairman Greenspan from 1988–92. Using commentary from the FOMC transcripts, this article shows that the FOMC believed that monetary policy had turned too restrictive in 1995. Although the restrictive policy had helped to defuse the buildup of inflationary pressures, it was nonetheless raising the risk of an unnecessary slowing in the pace of real economic activity. Accordingly, Greenspan convinced the FOMC to adopt an opportunistic disinflation strategy that would eventually reduce inflation and avoid a recession. Another aspect of this strategy was to ratify the decline in market interest rates that had occurred prior to the July meeting.