US Monetary Policy In 1995 Essay Research — страница 2

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p122) Dr. Evans concludes that the Fed’s actions in July were “purposely misleading, cravenly political, and just plain stupid.” (Evans, Industry Week, Aug. 21, 1995. p122) Many people applauded the actions of the Fed in 1995, and defend them from the rampant “fed-bashing”. One of the defenders of the Fed’s monetary policy and Alan Greenspan is Rob Norton who wrote an article in the July 24, 1995 issue of Fortune entitled “The Blaming of Dr. Greenspan. (Federal Reserve Board Chairman Alan Greenspan Takes Blame for Economic Downturn).” Mr. Norton agrees with Greenspan that in February 1995 it was essential to raise interest rates because of an unsustainable rate of growth. He says that Greenspan was ahead of the game by doing this. “The conventional wisdom crowd

claimed that here was no reason to fear that the economy was going to overheat,” he goes on to say “By the fourth quarter of last year, real GDP was growing at a 5.1% rate–twice the average growth rate most economists consider sustainable in the U.S., given population growth and productivity increases.” (Norton, Fortune, July 24, 1995. p39) Mr. Norton also does not believe that Alan Greenspan cut rates in July to ensure his re-nomination in March, 1996. He points out that during the 1988 Presidential campaign, with inflationary pressures present, many economists felt Greenspan would not raise rates because he is a loyal Republican, and he did not want to hurt the Republican’s chances in the campaign. Chairman Greenspan went against most people’s predictions and raised

rates “just days before the Republican convention.” (Norton, Fortune, July 24, 1995. p39) Another defender of the Fed’s policies during 1995 is Michael Sivy, who is a chartered financial analyst and a former Wall Street research director, wrote an article titled “The Fed’s Rate Cut Decision could Push The Dow to 4900 and Postpone a Recession,” which appeared in the Aug. 1995 edition of Money magazine. He stated that Greenspan “decided to send businesses and consumers a clear signal: Interest rates won’t go any higher.” But Greenspan still was on the lookout for any inflationary pressures, so he reduced rates by a very small amount in July, which will be followed by more small rate cuts. Mr. Sivy states “With the Fed fine-tuning the economy like that, we think

the Dow could tack on another 200 points to top 4900 by year-end.” (Sivy, Money, Aug. 1995. p160) Through my research on 1995 monetary policy, I feel the Fed did a good job of monetary policy during 1995. During 1994 and early 1995 I believe the Federal Reserve were justified in their actions in stepping up interest rates. Inflationary pressures were definitely present at the time, and if the fed let the inflation occur, how high would they let it go? This might also mean going through disinflation in the future, which is a long and painful process. The Fed did the right thing by not even letting inflation “out of the bottle.” As for the Fed’s cutting of interest rates in the middle and latter parts of the year, I believe the data suggests the economy was slowing down,

along with that, inflationary expectations were fading also. This made it relatively easy for the Fed to lower rates. But they made sure they watched inflationary pressures at the same time. I still haven’t made up my mind whether Greenspan based part of his decision to cut rates on political reasons or not. Sure, he could probably make 10 times more in the private sector, but I believe more goes into it than that. Many people see the Chair of the Federal Reserve as the 2nd most powerful person in the U.S. right behind the President, this in itself could persuade Greenspan into pleasing the President who reappoints him. Another point would be going down in history. If Greenspan successfully obtains an unprecedented third term, he will probably be highly regarded in every

history book yet to be made; it’s doubtful that Greenspan would go down in history if he were the president of the Chase Manhattan Bank. As Rob Norton defended Greenspan in saying that he raised rates even though the Presidential election was just around the corner in 1988; Greenspan was only in the 2nd year of his 4 year term, so there wasn’t any substantial political pressure, he still had about 3 years left of his term. At any rate, I believe that the Fed had a very successful year of monetary policy. The stock market soared, inflation and unemployment are both at respectable levels, so I just hope the Fed keeps it up, and President Clinton re-appoints Alan Greenspan.