At its meetings from March to July, the inflation risks accompanying the continued strength of domestic demand and the tightening of labor markets necessitated that the FOMC place itself on heightened inflation alert. Although the FOMC kept the nominal federal funds rate unchanged, it allowed the real funds rate to rise with continuing declines in inflation and, presumably, inflation expectations.
In August, the FOMC returned to an unbiased policy predilection in response to the adverse implications for the U.S. outlook of worsening conditions in foreign economies and in global financial markets, including our own. Shortly thereafter, a further deterioration in financial market conditions began to pose a more serious threat to economic stability.