The first chapter of this yearly document states, "The expansion of theU.S economy continued for a sixth consecutive year in 2007. Economic growth was solid at 2.5 percent during the four quarters of the year, slightly below the pace during 2006. Payroll job growth set a record for continuous growth, eclipsing the previous record of 48 months. This economic growth came despite a reorientation of the U.S.economy away from housing investment and toward exports and investment in business structures. The persistent tumble in housing investmentsubtracted roughly a percentage point from real Gross Domestic Product (GDP) growth during the four quarters of the year. Although the quarterly pattern of real GDP was uneven, with strong growth in the second and third quarters and weak growth in the first and fourth quarters, much of the quarter-to-quarter variation can be attributed to net exports, a volatile component of GDP. In the wake of mounting problems with the performance of subprime (defined as higher risk) mortgages, financial markets from August onward were unsettled because of concerns about the risk entailed in holding some types of mortgage-backed securities, as well as fears about the financial health of some firms and the possibility of contagion to the nonfinancial economy. To insure against the downside risks from these financial and housing-related developments, the President called for an economic growth package to boost consumption, business investment, and labor demand.
The core CPI (consumer prices excluding food and energy) as well as the
price index for GDP (covering everything produced in the United States)
suggested that inflation had moved lower and into the moderate range by the end of 2007. Food price inflation climbed, however, while energy prices jumped toward the end of the year. In response to these output and inflation developments, the Federal Reserve held the Federal funds rate flat through August. The Federal Reserve then lowered its policy rate by a percentage point from September through December and another 1¼ percentage point in January to ease liquidity concerns in financial markets disturbed by the mortgage market tumble, and to bolster real activity. The Federal Reserve also took other liquidity-enhancing measures, including cutting the discount rate at which it lends to banks, and initiating a new auction approach to provide collateralized loans to banks."