| In The News #8 >> | ||
>> TITLE Fed Tries to Calm Markets Lead Story-Dateline: >> SUMMARY For most of the past 50 years the Fed has indicated inflation was “too” high. Now, with inflation hovering at around 1%, the Fed views the economic situation as uncharted territory. However, Fed policy makers have failed to convince the market of that fact. The financial markets expect business as usual and interpreted the Fed’s recent unwillingness to take additional drastic action to stimulate the economy as a sign that interest rates might be going up soon and the bond market erupted in turmoil. Investors pushed bond yields higher in anticipation of a rate increase
while the Fed struggled to draft an economic outlook statement designed
to reflect its assessment of the inflation risk and the prospects of
economic growth. Knowing the power of Fed comments, the statement has
undergone multiple revisions and is still a “work in progress.” The
Fed’s challenge is to convince the financial markets that its
history of being aggressively proactive in fighting inflation will
not interfere with the fledgling economic recovery.
>> Thinking About the Future The Federal Reserve’s primary function is to conduct monetary policy for the United States. In that role, the central bank tries to achieve an acceptable level of economic growth while maintaining price level stability. The Fed’s current challenge is to stimulate a flagging economy without stimulating inflation. In times past, the Fed has been criticized as increasing interest rates too quickly and putting a damper on economic growth. However, this recovery appears different from recent recoveries in that output is increasing while unemployment is lingering longer. It will be interesting to see when the Fed raises rates, indicating the economy is truly back on track.
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