Essay Federal Reserve Policy
Intended goals of Reserve’s interest rate changes & impact on stock market, prices & wages, inflation & business decisions.
Absent the presence of special factors, interest rates drive the stock market. Monetary policy is the government’s most versatile policy tool. Through adjustments in bank reserves, and thus loanable funds, Federal Reserve Bank policymakers can influence interest rates (the cost of money and credit). The ultimate impact of these adjustments is on economic activity. When interest rates increase, economic activity is curtailed. Conversely, when rates decrease, economic activity expands. Since stock market growth is fueled, in part, by business expansion, market analysts pay close attention to every move made by Federal Reserve Board Chairman Alan Greenspan.
The Federal Reserve policymakers target a desired rate of money growth. This targeting is reflected in the movement of the federal funds rate (the rate on reserves loaned and borrowed..