Monetary Policy

[michael perelman <michael@xxxxxxxxxxxxxxxxx>]

I am seeing more and more stories doubting that a recovery is on the
near horizon.  Notice the quote below

"We think the economy has got
real problems that won't be
rectified quickly," said William
Dudley, an economist with
Goldman Sachs & Co. in New
York. "We think monetary policy
in this environment is not very
effective."

I think that the smashing of Greenspan's myth, along with the possible
failure of monetarism and tax cuts, may open up the possibility that
people might be receptive to a substantive dialogue about the economy.
Certainly it will make teaching easier next week.

August 21, 2001
Economy
Fed Trims Interest Rates a Quarter Point
And Warns More Cuts May Be Necessary
A WALL STREET JOURNAL ONLINE News Roundup
WASHINGTON -- The Federal Reserve cut short-term interest rates by a
quarter
point and signaled it is prepared to do more to jump-start the
struggling economy.
While long-term prospects for economic growth remain
good, the Fed said it sees continued risk of further
weakness.
The central bank noted that while consumer spending has
held relatively steady, business profits and capital
spending continue to weaken. That pressure has kept
inflation contained, the central bank said.
Tuesday's move put the central bank's target for the
federal-funds rate -- which banks use to lend to each
other overnight -- at 3.5%, its lowest level since April 1994. The
target stood at
6.5% at the beginning of this year.
The Fed also cut the largely symbolic discount rate, which the Fed
charges to
member institutions, to 3% from 3.25%.
Recent consumer-price data, meanwhile, have indicated that inflation
remains
largely in check, giving the Fed plenty of room to stimulate growth
without
worrying that prices will move dangerously higher.
Nevertheless, the central bank's rate cuts can take several months to
have an effect,
and there are some signs the economy might still have some strength left
in it.
Economists point out that the unemployment rate held steady at 4.5% in
June.
Though that represents an increase from the 4% rate logged for most of
last year, it
remains low by historical standards.
And on Monday, a key gauge of future economic activity rose, suggesting
the
economy may improve sooner rather than later. The Conference Board said
its
composite index of leading indicators increased by 0.3% in July, its
fourth
consecutive monthly increase.
The Fed's next meeting is Oct. 2.
--

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx