Fed and Interest Rates Essay example -- essays research papers

The Fed and Interest Rates Dave Pettit of The Wall Street Journal writes a daily column that appears inside the first page of the journal's Money & Investment section. If the headlines of Mr. Pettit's daily column are any accurate record of economic concerns and current issues in the business world, the late weeks of March and the early weeks of April in 1994 were intensely concerned with interest rates. To quote, "Industrials Edge Up 4.32 Points Amid Caution on Interest Rates," and "Industrials Track On 13.53 Points Despite Interest-Rate Concerns." Why such a concern with interest rates? A week before, in the last week of March, the Fed had pushed up the short-term rates. This being the first increase in almost five years, it caused quite a stir. When the Fed decides the economy is growing at too quick a pace, or inflation is getting out of hand, it can take actions to slow spending and decrease the money supply. This corresponding with the money equation MV = PY, by lowering both M and V, P and Y can stabilize if they are increasing too rapidly. The Fed does this by selling securities on the open market. This, in turn, reduces bank's reserves and forces the interest rate to rise so the banks can afford to make loans. People seeing these rises in rates will tend to sell their low interest assets, in order to acquire additional money, they tend move toward higher yielding accounts, also further increasing the rate. Soon this small change by the Fed affects all aspects of business, from the price level to interest rates on credit cards. Rises and falls in the interest rate can reflect many changes in an economy. When the economy is in a recession and needs a type of stimulus package, the Fed may attempt to decrease the interest rates to encourage growth and spending in the markets. This was the case from 1989 until last month, during which the nation's economy was generally considered to be in a slight to moderate recession. During this period the Fed tried to keep interest rates low to facilitate growth and spending in hard times. However, when inflation is increasing too quickly and the economy is gaining strength, the Fed will attempt to raise rates, as it did late last March. This can be considered a sign that we are pulling out of the r... ..."slight" increase as opposed to one of "somewhat greater" magnitude. This article is interesting because it shows that even the Fed can be uncertain about what is best for the economy, but it still focuses on the power of Allen Greenspan, as well as the committee as a whole. It compares the two arguments of each method, and shows a weakness in the Fed that may have been unknown to the reader before. The Wall Street Journal (Mon. April 11, 1994) - "Fed Moved Too Slow On Increasing Rates" This recent article criticizes the Fed's actions in raising the interest rate, and complains that the Fed has fallen behind in it's job. It discusses the plan for a "Neutral" policy and what the Fed has tried to do and not do to maintain this so called policy. It argues the motives and reasons for wanting a lower interest rate and compares past decades to today's standings. Overall it focuses deeply on the need to check inflation and if it is valid. It shows that the Fed tends to take a more conservative approach to the economy than some analysts would prefer, but that the Fed will probably continue to raise interest rates.