The Fed's 'insurance policy'- can we expect it to work?
Here are three other measures of where the economy is headed through 1999.;After growing at about a 3.5% annual rate in 1998, we expect gross domestic product to rise at the slower yearly pace of 2.3% in 1999.
By Daryl Delano -- Modern Materials Handling, 12/1/1998
After months of lurid tales from Washington, D.C. of the personal lives of political leaders, economic news finally managed to get equal billing early this fall. We can thank global economic turmoil and Alan Greenspan for that.By lowering the U.S. Federal Reserve funds rate for the first time in almost three years, monetary policy makers said that they hoped to "cushion" the effects of weak economies abroad on future economic growth. They also hope to buoy world financial markets and stem the tide of investment money flowing away from, rather than towards, those fragile emerging economies that need it now more than ever.
The Fed's moves were largely seen here as a way of taking out a modest "insurance policy" against future recession, a way of making a pre-emptive strike against the global forces that threaten to finally derail this long period of U.S. economic expansion. If successful, we'll never know if such action was truly necessary. If unsuccessful, we'll conclude that the move was too little and too late.
Given domestic economic conditions-accelerating wage inflation, low unemployment, solid income growth- there simply was no valid case to be made for lowering interest rates.
What caused this change of heart (as late as early August, most Fed watchers were still predicting that the next move on interest rates would be up, not down)? After careful consideration of all of the financial market news and all of the economic data that has been released during the spring and summer of this year, the voting members of the Fed concluded that they could no longer view inflation as the primary threat to the U.S. economy. Rather, they judged that the intensification of global economic turmoil threatened to do serious damage to U.S. economic growth during the balance of this year and into 1999.
The Fed's action should help to stabilize the world economic situation. However, no one believes that it's a silver bullet. Despite the estimable economic policy-making skills and track records of Fed Chairman Greenspan and Treasury Secretary Robert Rubin, it's clear that global economic events simply can't be managed and controlled by U.S. actions to the same degree that domestic economic growth can be fine tuned. Consequently, we approach 1999 with a great deal more uncertainty than at any time since the last recession ended in 1991.
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