The continued decline in trend labour productivity growth, induced by both a reduction in capital deepening and total factor productivity8, implies that the euro area was already experiencing a negative supplyside shock when the oil price rise occurred.
In this particular episode, the risk of doing too little appeared to exceed the risk of doing too much, and the FOMC undertook a relatively aggressive strategy of rate cuts, as I mentioned in the introduction. Similar considerations presumably played a role during the 1994-95 tightening cycle, when concerns that inflation might rise significantly induced a relatively more rapid tightening.