The economy was slow to respond to the Federal Reserve Board's money- tightening policies last year, and banks may bear part of the blame, according to Federal Reserve Board Governor Janet Yellen.
After the Fed raised interest rates seven times for a total of 300 basis points between February 1994 and February 1995, the agency expected high consumer demand to cool off, easing any potential inflationary pressures. But the economy continued to accelerate through the end of 1994.
The economy's slow reaction was due, in part, to a general credit easing by the banking industry, Ms. Yellen told a meeting of Women in Housing and Finance.
In an attempt to remain competitive in the loan market, Ms. Yellen said, banks relaxed their credit standards, made riskier loans, and eased requirements on personal guarantees.
"There was a very noticeable easing of credit terms, and that may have partially offset the increase in the price of credit," Ms. Yellen said. "The movement in credit terms was unusual, and it may have muted the impact of the board's tightening."