Subject: THE FED AND INTEREST RATES
Changing the interest rates is definitely a good monetary policy for the Fed to use when slowing down or speeding up the economy. The government would want to speed up the economy when the economy is in a recession because the goal of the Fed is to promote economic growth. On the other hand, the economy will want to slow down the economy when the economy is growing so rapidly that the inflation rates are rising rapidly as a result. Economic decisions, such as monetary policy, are all part of a game, but in this game there is no way to see what is going to happen. All one can do is guess what they should do to encourage economic growth.
Background Information on Newspaper Article
According to economic analysts, the Fed is expected to lower the interest rate from its current 4% down either a half-point or a quarter-point. This will be the first time since 1994 that the Fed’s key rate has been below 4%. According to the paper, “Just how worried the Fed still is about U.S. companies’ shrinking earnings will be evident in the size of this week’s cut…” From this expectation of lowering the interest rate, one can derive that the Fed believes the economy is in a recession an in order to get the economy out of the recessionary gap the Fed must lower interest rates.
In opposition to the Fed’s future decision, is a distinct minority of economists. These economists argue that the Fed has already cut the interest rates enough and that they should let those cuts work their way into the economy. Those who are in favor of the interest rate cut argue “With the market still down year to date, layoffs and bankruptcies rising and few signs of a turnaround in spending on technology equipment, yields on short-term Treasury securities continue to signal that the Fed isn’t done cutting.”
Now that both sides have made their argument