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Economics Article Analysis: How far will the Fed go?

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Introduction

I.B. Economics S.L.II Jenna Carey Mr. Bleiler Block G November5th 2002 "How far will the Fed go?" Due to a weakening in the economy and in effect, an increase in the unemployment rate from 5.6% to 5.7%, the Federal Reserve Policy makers are faced with the decision of how much to cut interest rates in order to strengthen the economy and improve the current problem. Although the cut itself is almost ensured to be put into action, there is some debate and questioning over whether the cut will be one of a quarter-percentage or a half-percentage. ...read more.

Middle

The Federal bank will have to act using their monetary policy to deliberately change the interest rates in order to affect the economy. Since interest rates affect spending on durable goods, investment spending and saving, changes that are made to interest rates will have a direct affect on the aggregate demand. The effect of a cut in interest rates will cause consumers to spend more of their income. Rather than investing their money in a bank account and accumulating interest, the consumers will want to borrow money with lower cost, and spend the money that they do have. ...read more.

Conclusion

The half-percentage cut may be a more aggressive action to take, but one economist, Diane Swonk believes that if the cut is going to be made it should be done so in one action, not drawn out with various quarter-percent cuts. Others believe that by leaving the possibility to make another quarter-percent cut later on, the consumers will feel more secure that the Fed is able to make further cuts if the economy remains weak. Either way, the cuts are necessary for improving the economy and avoiding a recession. Even if they will not take full effect initially, the public will be provided with a feeling of security and this alone can help in stabilizing the economy. ...read more.

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