US Monetary Policy In 1995 Essay Research

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U.S Monetary Policy In 1995 Essay, Research Paper U.S Monetary Policy in 1995 When Alan Greenspan presented the Federal Reserve’s semi-annual report on monetary policy to the Subcommittee on Domestic and International Monetary Policy, the Committee on Banking and Financial Services, and the U.S. House of Representatives on February, Dr. Greenspan touted a cautionary yet favorable view of the U.S. economy. He states that “With inflationary pressures apparently receding, the previous degree of restraint in monetary policy was no longer deemed necessary, and the FOMC consequently implemented a small reduction in reserve market pressures last July.” (Greenspan, 1996, Speech) During the Summer and Fall of 1995, the economy experienced a strengthening of aggregate demand

growth. According to Greenspan, this increase in aggregate demand brought finished goods inventories and sales into near equilibrium. The Fed’s fine tuning of the economy seemed to be paying off. Greenspan had a positive outlook for the economy for the rest of 1995. He states “the economy, as hoped has moved onto a trajectory that could be maintained–one less steep than in 1994, when the rate of growth was clearly unsustainable, but one that nevertheless would imply continued significant growth and incomes.” (Greenspan, 1996, Speech) Towards the end of the year, the economy showed signs of slowing. Fearing a prolonged slowdown or even a recession in the economy, and with inflationary expectations waning, Chairman Greenspan and the Federal Reserve cut rates again in

December. (Greenspan, 1996, Speech) There are, of course, critics of 1995’s monetary policy. Most of the criticism came in the early part of 1995 when the Fed raised rates again. In the article “Are We Losing Altitude Too Fast” from the May 1, 1995 issue of Time magazine written by John Greenwald, he explains that the economy might not be coming in for a “soft landing” like the fed predicts. Trying to sustain 2 to 3 percent growth might lead us into a recession. Mr. Greenwald explains how the Fed’s actions in 1994 and early 1995 has hurt individuals and the economy as a whole. “Corporate layoffs are far from over,” says Greenwald, “they generally accelerate when firms find themselves in an economy that is weakening.” (Greenwald, Time, 5/1/95, p80) Unemployment

and layoffs aren’t the only thing to worry about according to Mr. Greenwald. The automobile industry and the housing markets are both getting hit in the pocket books. Paul Speigel, owner of a New York car dealership explains his woes by saying ‘”We’re doing our best to keep up the volume by discounting, working on our customers, but the Fed’s rate hikes have dampened the ability of many Chevrolet customers to buy that new vehicle.”‘ John Tuccillo, chief economist for the National Association of Realtors states that the market (for new housing) “fell apart as mortgage rates rose above 9% last fall (1994), and still have not yet recovered.” (Greenwald, Time, May 1, 1995. p81) Another outspoken, and cynical opponent to the Fed’s monetary policy is Dr. Michael K.

Evans, who is president of Evans Economics, Inc. and Evans Investment Advisors, Boca Roton, Fla. Dr. Evans wote an article in the Aug. 21, 1995 issue of Industry Week entitled “The Gang that Wouldn’t Shoot Straight: Fed’s Trample Over Their Own Rate Cut.” Dr. Evans contends that lowering the federal funds rate in July was a mistake because the economy was already starting to recover without tampering by the Fed. He claims Greenspan knew full well that the economy was on the upswing, but cut rates anyway to try to ensure his reappointment come March 1996. Dr. Evans claims that vice-Chairman Alan Blinder also knew of the recovery but “he could not face his collegues at Princeton when he returned, unless he pushed for a rate cut.” (Evans, Industry Week, Aug. 21, 1995.