As reported
here, Ben Bernanke is indicating that the Fed will likely drop interest rates at their meeting in January. A few quotes of interest, along with questions that you should be able to answer by the time we finish this course.
The Fed chairman said “we stand ready to take substantive additional action as needed to support growth and to provide additional insurance against downside risks”.
(How can the Fed support growth?)He warned that the strains in financial markets “continue to pose a downside risk to the outlook for growth” with investors still uncertain about the true value of complex financial assets and about the extent of additional losses that may be disclosed in the future. The financial situation “remains fragile and many funding markets remain impaired” he said.
(To what extent can the Fed affect the attitude of the financial market?)The Fed chairman did not discard the US central bank’s inflation concerns, warning that the renewed strength in oil prices was “lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well”. He hinted that provided inflation expectations remained steady this would not get in the way of Fed easing, but said “we will be closely monitoring the inflation situation, in particular as regards inflation expectations”.
(Why is the Fed worried about inflation? And what do they have to do with it?)
4 comments:
This article talks about how the Fed is ready to cut interest rates aggressively to ward off the risk of a US recession. The Fed wants to support growth in the economy. Economic growth is the sustained increase in a nation's GDP. The GDP growth is essential for improvement of the standard of living, as measured by GDP per capita. Economic growth is a general sign that a country's economic activity is successful.
According to the article, the economy only grew at a "moderate pace" in the final quarter of 2007. So many things have happened such as the demand for housing has gone down, oil prices continue to rise which makes consumer spending go down.
Finacial markets are also being strained. Bernanke said, the financial sitaution "remains fragile and many funding markets reamin impaired."
Bernanke also talks about how the labour market is also a "consequential risk to growth." The labour market was pretty stable as of December 2007 but if it deteriorates the risks to consumer spending would rise.
A lowering of interst rates would also increase Investment, which could also help economic growth.
The United States just seems to be in crunch right now. Even with the tax rebate coming in May I feel that it may not help us out much. People want to save but have to spend their money on other things like gas for their cars in order to get around. Then with the housing crisis, homewowners just don't seem to be getting a break.
In the article “The Fed Chair Speaks” Ben Bernanke said that the Fed was ready to make some changes to stimulate the economy, spending about $100bn. Also Bernanke said that the financial market was in a continual downward spiral as far as investors are not so confident of purchasing investments in this situation. Also mentioned the rapid increase of prices, or a fast inflation rate that is not helping the economy to get out of this hole.
As far as the Fed trying to support growth the only possibility that they can have power on is lowering interest rates, which it will attract more investors including foreign ones, yet even if the banks do get profit from this so is the economy. Second thing that the fed can do is increasing the money supply for people to have more money to spend. Although this is a tricky one sine the propensity to consume has been altered by the high inflation.
As for the inflation part of the problem, the fed is right on being a little concern of the inflation rates. For example, as prices of oil as Bernanke point out the propensity to consume of the people lowers since they now have to spend more money on getting from one place to another. And since gas is a very inelastic product that everybody uses, it is really hard to look for alternatives to go around that problem as far as consumption point of view.
This article explains Ben Bernanke’s public opinion to take measures to neutralize the impending recession. His reasons for having to take this action include, the slowing growth of the economy in 2007, the grim outlook for economic activity in 2008, lower demand for housing, higher oil prices, strains on financial markets, instability in the labor market, and troubled expectations of consumers and lenders. Bernanke, “indicated that the Federal Reserve is ready to cut interest rates aggressively to ward off the risk of a US recession, sending stocks soaring.”
In order to cut interest rates the Fed will have to increase the money supply by buying treasury bonds, decreasing the reserve ratio (the amount of cash banks must hold relative to their deposits,) or by lowering the discount rate (the interest rate the Fed charges banks to borrow money for reserves.) The Fed encourages banks to sell treasury bonds by raising the price of the bonds. Since banks can get more money for the bonds, they sell them to the Fed. This causes an increase in the money supply. Decreasing the reserve ratio also increases the money supply by allowing banks to keep less money tied up in vaults so more money is introduced into the economy. Lowering the discount rate changes the money supply by letting banks borrow money from the Fed to meet their reserve requirement at a lower interest rate than the banks charge their borrowers. Since the bank is now free to lend out more money and make a profit because it has bought reserves from the Fed at a lower rate, more currency is introduced. These increases in money supply will cause an outward shift of the LM curve, and an increase in output (economic growth.) This would help the country out of its path of slowing economic growth.
Congress’ recent decision to disburse economic stimulus packages, lowering taxes, has also created a need to expand the money supply. By lowering taxes congress aims to increase output, but this will also cause an upward shift in the IS curve. This shift will cause interest rates to rise. Hopefully the falling interest rates from the expansion of the money supply will balance the rising interest rates from lowering taxes, and together they will have a positive effect on economic growth.
The article begins by stating that Ben Bernanke has said that the Federal Reserve can cut rates if need be. This consequently lead the stocks to rise. Bernanke assured the Federal Reserve will do all that it can to keep the economy ticking. Bernanke stated that the economy most likely grew a medial rate during the end of 2007. He further explained, the data is indicating that the economy doesn't seem to be in great condition going into 2008. Bernanke gave a slew of reasons for the slowdown: first the housing market's woes, “higher oil prices, lower equity prices and softening home values.” He explained that growth could reduce further because inverters are unsure of the real damage that has occurred. Bernanke further explained that banks have begun to be more selective in their lending ways which will be a main point for the barrier in growth. He said if further information is disclosed it has the potential of slowing the economy down even more. The labor market has also begun to show some weariness, where it was more robust beforehand. He explained that worsening of the labor market could reduce spending. Towards the end of the article there is mention of oil prices increasing the prices of other goods.
There are three question that are posed. The first one: How can the Fed support growth? The main way the Fed increases growth is by slashing the interest rates. The Fed lowers the interest rate at which banks lend money to one other. By doing so the Fed generates more money. A lower interest rate increases the incentive to borrow and spend. The spending increases the economy.
The Second question is: To what extent can the Fed affect the attitude of the financial market? The Fed can greatly effect financial markets. By lowering the interest rates people have a greater affinity towards spending. But the effect is limited. If massive problems arrive the Fed only able to somewhat stop the situation from worsening to a greater extent. And in the case of what is happening currently, so many factors have combined to send the economy, possibly into a recession.
The third question is: Why is the Fed worried about inflation? And what do they have to do with it? Inflation will raise the price of goods for people. The article explains that it seems that the higher price of oil is leading the prices of other commodities to go up also. Historically speaking, the Nominal interest rate has always been side by said either inflation rate. The higher the nominal interest rate, the higher the inflation rate. The lower the nominal interest rate, lower the inflation. So in theory if the Fed can keep the Nominal interest rate low, the inflation should also be low.
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