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The Fed and Interest Rates Dave Pettit of The Wall Street Journal writes a daily column that appears inside the first page of the journals Money Investment section If the headlines of Mr Pettits daily column are any accurate record of economic concerns and current issues in the business world the late weeks of March and the early weeks of April in 1994 were intensely concerned with interest rates To quote Industrials Edge Up 432 Points Amid Caution on Interest Rates and Industrials Track On 1353 Points Despite Interest-Rate Concerns Why such a concern with interest rates A week before in the last week of March the Fed had pushed up the short-term rates This being the first increase in almost five years it caused quite a stir When the Fed decides the economy is growing at too quick a pace or inflation is getting out of hand it can take actions to slow spending and decrease the money supply This corresponding with the money equation MV PY by lowering both M and V P and Y can stabilize if they are increasing too rapidly The Fed does this by selling securities on the open market This in turn reduces banks reserves and forces the interest rate to rise so the banks can afford to make loans People seeing these rises in rates will tend to sell their low interest assets in order to acquire additional money they tend move toward higher yielding accounts also further increasing the rate Soon this small change by the Fed affects all aspects of business from the price level to interest rates on credit cards Rises and falls in the interest rate can reflect many changes in an
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