http://biz.yahoo.com/ap/080429/fed_interest_rates.html?.v=4
The United States is still in recession and the interest rate cuts are slowly working to allow a better economy. However, inflation is becoming a huge problem in food and energy prices. The Federal Reserve plans to lower the rate to 2% and then leave it at this level for the year and maybe the next. They will have a meeting on April 29th to decide what their best move is. The problem is that if they lower the rates too much, inflation becomes a problem, but if they don’t lower the interest rates, the recession will be a problem.
This chapter explains how the bank can change economic situations by changing interest rates. We learned that a lower interest rate would lead to increased borrowing, which leads to an increase in spending. With increased spending, GDP would rise and allow the economy to counter a recession. The United States is trying to do this, but inflation is kicking in since there is more money, it is wise of companies to increase prices. This inflation will make the increase of money supply not effective as a way to counter the recession since inflation causes demand to drop.
I think the United States should slowly lower their interest rates without causing too much of a decrease so that inflation doesn’t kick in too fast. Leaving it to 2% and then taking a break doesn’t seem like a good idea in my opinion because inflation will be a huge problem. They should just increase government spending and continually changing interest rates to the economic situations to increase GDP. The recession is also not that bad in my opinion. They could possibly just let it pass by and not do too harsh economic changes that may cause side effects such as inflation.
Tuesday, April 29, 2008
Chapter Seven: Fed poised to cut rates; may take a break after that
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2 comments:
Knowing when to adjust interest rates and by how much to influence the economic situation can really be a juggling act. From my point of view, the Federal Reserve’s decision to decrease interest rates – to stimulate economic growth by discouraging people from placing money in the banks – seems to mean that they have assessed the possibility of recession to be a greater problem than inducing a certain level of inflation. I am not the professional in the field, but I think that simply reducing interest rates and then sitting back for a few years and watching what will result is not the way to go. Constant and continual surveillance of the ever-changing economy is necessary to help make appropriate decisions in the future at suitable intervals of time (not over a several yearlong break) because no one knows what mysterious factors might pop up and influence the US state of affairs.
I don’t think that the Federal Reserve truly plans to lower the rate to 2% and to leave it at that for the next few years. The probability of an economic twist occurring is quite high, and even if it is minor at first, it can easily escalate into something grand that can change the state of any economy. Also, predicting the future of macroeconomics is really difficult as there are many factors that can easily alter the flow of any economy such as if a new region of oil were to be discovered; it would heavily decrease the current inflating oil prices. The Federal Reserve probably only stated to keep the rate at 2% because of expecting external factors to be constant.
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