But through early 1999 we remained somewhat concerned about the degree of recovery in both financial markets and foreign economies. The net result was that the nominal funds rate remained constant during this phase, instead of tightening in line with the Taylor rule prescription.
In effect, policymakers could be interpreted as attenuating their response to the unemployment and output gap in line with the theoretical models and empirical results I have talked about. Beginning in mid-1999, with the estimated output gap increasing further and growth shifting to a still-higher gear, policymakers became more concerned about the possibility of overheating and, hence, the risks of higher inflation.