The U.S. economy turned in another solid performance during 1998, with faster real growth and employment gains, and lower inflation, than many observers had expected. From the standpoint of monetary policy, the year’s pivotal point occurred in August, when the Russian government defaulted on its domestic debt and devalued the ruble. Before August, policymakers focused on whether an explicit policy tightening would be needed to slow domestic demand enough to prevent an increase in inflation. Financial market upset triggered by the Russian government’s actions, coupled with ongoing concern about economic weakness in Asia and Latin America, precipitated a scramble for liquidity and safety affecting U.S. financial markets. The FOMC accommodated the increased demand for liquidity by easing policy on three occasions. These actions were taken not just to assuage financial markets, but to preserve the ongoing economic expansion.