The Federal Reserve Policy

For instance, if the action of the national substitute results in an increase in the federal funds reckon and other money mart ordains, upward pressure on bond yields occurs. A depressing influence on form prices occurs shortly thereafter. A sustained increase in liaison rates hurts the stock market in two ways. First, higher(prenominal) interest rates make bonds more attractive investments than stocks. Second, cost increase interest rates eventually weaken economic legal action and depress the profits outlook. Conversely, under most circumstances, a gloaming in the federal funds rate get out drill downward pressure on bond yields and, in turn, stumble an increase in stock prices. Stock market participants answer that depress rates not only improve the scrap of stocks relative to money market instruments and bonds, but also eventually stimulate economic activity and profits. Mere rumors of a proposed remind by the federal official earmark to raise or busteder-rankinger interest rates can result in unpredictability in all major financial markets: "Even in a highly competitive market, characterized by high volumes and in operation(p) on a global scale, personal contacts and reputations of individual traders and managers gip important roles" (Burnham, 1991, p. 124).

Greenspan has repeatedly made it clear that the goal of the Federal Reserve is price stability. Price stability minimizes corporate skepticism and contributes to sustainable economic growth. Corporate

It behooves corporate managers to pay attention to interest rate trends. The availability of money and credit exerts a powerful influence on business investment in new plant and equipment. Consumer disbursal on housing purchases and other "big ticket" items give care automobiles also fluctuate based on the government's monetary policy: "Fed action on interest rates will affect the jobs, loans, and mortgages of millions of citizens and companies" (Miller, 1997, p. 49).

Gerald Ford's presidency was characterized by severe recession. The economy stalled ill in 1974-1975. Unemployment reached the double digit level and the stock market reacted accordingly. Tax receipts dropped as business stagnated and the federal famine rose to record levels.

Foust, D.

(November 10, 1997). Just what the chairman ordered. Business workweek (p. 46).

Another un coiffetling economic trend for the Federal Reserve is the unemployment rate. The unemployment rate stands at under five percent, the lowest it has been in decades. Economists reckon that if the unemployment rate continues to remain low, inflation is sure to follow. If the Federal Reserve could be certain that productivity is within normal limits, low unemployment would not be so troublesome. When there is too much(prenominal) money in the real economy (caused by low unemployment) demanding too few goods (the result of decreased productivity), the stage is set for price inflation. Low unemployment is usually accompanied by pay increases, another forerunner of inflation but the economy appears to be shrugging off employment gains, "[Greenspan] is heartened that the economy was able to swallow a hike in the federal minimum wage without so much as an inflationary hiccup" (Foust, 1997, p. 46)

Greenspan has long bemoaned the Federal Reserve's reliance on weak statistics that fail to evaluate changes in the new economy. For instance, the consumer price index (CPI) is known for being overstated. And economists confide that o
Order your essay at Orderessay and get a 100% original and high-quality custom paper within the required time frame.