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The Fed and Interest Rates Dave Pettit of The Wall Street Journal writes a daily column thatappears inside the first page of the journals Money Investmentsection If the headlines of Mr Pettits daily column are any accuraterecord of economic concerns and current issues in the business worldthe late weeks of March and the early weeks of April in 1994 wereintensely concerned with interest rates To quote Industrials Edge Up432 Points Amid Caution on Interest Rates and Industrials Track On1353 Points Despite Interest-Rate Concerns Why such a concern withinterest rates A week before in the last week of March the Fed hadpushed up the short-term rates This being the first increase in almostfive years it caused quite a stir When the Fed decides the economy is growing at too quick a pace orinflation is getting out of hand it can take actions to slow spendingand decrease the money supply This corresponding with the moneyequation MV PY by lowering both M and V P and Y can stabilize ifthey are increasing too rapidly The Fed does this by sellingsecurities on the open market This in turn reduces banks reservesand forces the interest rate to rise so the banks can afford to makeloans People seeing these rises in rates will tend to sell their lowinterest assets in order to acquire additional money they tend movetoward higher yielding accounts also further increasing the rate Soonthis small change by the Fed affects all aspects of business from theprice level to interest rates on credit cards Rises and falls in the interest rate can reflect many changes in aneconomy When the economy is in a recession and needs a type ofstimulus package the Fed may attempt to decrease the interest rates toencourage growth and spending in the markets This was the case from1989 until last month during which the nations economy was generallyconsidered to be in a slight
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