Fed And Interest Rates Essay

1402 words - 6 pages

The Fed and Interest RatesDave Pettit of The Wall Street Journal writes a daily column thatappears inside the first page of the journal's Money & Investmentsection. If the headlines of Mr. Pettit's daily column are any accuraterecord of economic concerns and current issues in the business world,the late weeks of March and the early weeks of April in 1994 wereintensely concerned with interest rates. To quote, 'Industrials Edge Up4.32 Points Amid Caution on Interest Rates,' and 'Industrials Track On13.53 Points Despite Interest-Rate Concerns.' Why such a concern withinterest rates? A week before, in the last week of March, the Fed hadpushed up the short-term rates. This being the first ...view middle of the document...

During this periodthe Fed tried to keep interest rates low to facilitate growth andspending in hard times. However, when inflation is increasing tooquickly and the economy is gaining strength, the Fed will attempt toraise rates, as it did late last March. This can be considered a signthat we are pulling out of the recession, or atleast it seems the Fedfeels the recession of the early nineties is ending.Directly after the Fed's actions, the stock market was a mess. The Dowtook huge dips, falling as much as 50 points a day. Although no oneknows exactly what influences the market, the increase in interest ratesplayed a major role in this craziness. Mr. Pettit's column on March25th highlights, 'Industrials Slide 48.37,' Mr. Pettit attributes alarge portion of the market's 'tailspin' at this time to, 'Risinginterest rates at home.' It is certainly no coincidence that these twoevents happened at the same time.Alan Greenspan, the current chairman of the Fed comes under greatattack and praise with every move the Fed makes. He is, in a sense, theembodiment of the Fed. He has been in charge of the Fed since 1987.Some economists blame him for the recession of the early nineties. Hisinfluence on the interest rates as chairman of the Fed is monumental.It is his combined job as the Fed to steer the economy in a balancedmanner that does not yield too much to inflation and to keep growthsteady. Predictably, most economists are back seat drivers when itcomes to watching the actions of Allen Greenspan, and they tend to feelthey could much more successfully manage the economy than he. Many alsoagree with his tactics, so it is a two way street on which the chairmanis forced to drive.It seems that not only the analysts are in disagreement of how the fedshould operate, but interestingly enough, the internal policy makersseem to also disagree on what stance the Fed should take. Some of theinternal policy makers are interested in making a more substantialincrease now, while others opt for a more conservative approach, wherethe market can be tested for both good and bad influences from the rateincreases. Allen Greenspan is one of this more conservative group, andit is he is critisized by some for the irradic behavior in the stockmarket...

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