Rocky Economic Times, the Moods

¶ … rocky economic times, the moods and views of the Federal Reserve Chairman's Allan Greenspan have been almost as closely watched as the ups and downs of the Dow Jones average itself. Key to this concern and anxiety on the part of investors is the Fed's policy regarding interest rates. However, Edmund L, Andrews' article from November 8, 2004 New York Times' Business section, entitled, "Fed Expected to Stay the Course for Now," reads that a recent "startling economic report" of expanding growth is not enough to sway the Fed's policy," as a "rule of thumb" that has held throughout the agency's history. This strikes the general tone of the article, that amongst economists, the Fed is a bulwark of economic caution regarding inflation, in nervous and flighty economic times, uncertain the face of what seems a fragile state of job growth and general expansion.

In recent years, the Fed has lowered interest rates to stimulate a slow economy to make it more attractive for consumers to spend than to buy. Short-term interest rates reached "the rock-bottom level of 1% of earlier this year," and even if the central bank announces another rate increase on Wednesday, as most analysts expect, "real" short-term rates will still be slightly below zero after subtracting the effect of inflation. Also, according to the article's author Andrews, even "when the Labor Department reported on Friday that employment surged by 337,000 jobs in October, far faster than most forecasters had expected, market speculators immediately raised their bets that the Federal Reserve would not pause in its course of gradually raising interest rates," making saving rather than buying more attractive even during the height of the retail marketing season, where historically businesses have sought to get into the black during the Christmas rush. Although "Fed officials have left no doubt that they will raise short-term rates on Wednesday by a quarter point, to 2%, they are "still keeping their options open for December and next year," regarding raising rates because the agency remains chary about sudden shifts in policy, for fear of hyper-stimulating the economy and causing inflation rates to rise.

The cautious policy of raising of even short-term interest rates shows that inflation, rather than simply limiting economic growth is again a concern for the Fed. Historically, the Fed has always been most concerned about the economy growing too fast, outpacing real development, than other government agencies, which are apt to look upon growth with purely rose colored glasses. Despite the recent strong economic numbers regarding job growth, "which analysts said were broad-based and reflected more than just hiring connected to reconstruction efforts after the recent hurricanes, the economy is still showing signs of fragility." Thus, the Fed's caution and encouragement of saving rather than spending is of concern.