Discussion
Part 1
Interest Rates" Please respond to the following:
• Analyze the current position of the Federal Reserve Chairman and Board related to interest rates, money supply, and inflation, and the effectiveness related to these decisions. Predict the future of the economy based on this current strategy. Provide support for your prediction.
• Assess how investment decisions are influenced by expected future interest rate movements, indicating any confounding factors by investor habits and the resulting impact on the investment markets.
• Please provide one citation/reference for your initial posting that is not your textbook. Please do not use Investopedia or Wikipedia.
Part 2
Personally I do not trust anything that Federal Reserve Chairman and board have to say as it relates to the interest rates and economy. Grauwe and Polan (2005) investigated the quantity theory association between the supply of money and inflation rate. It showed positive and significant association between the long-run money supply growth rate and the inflation rate. Same conclusions were drawn by Christensen (2001).
According to the recent documentation that had been released, it was been revealed that Chairman and Reserve were blind to true financial crisis which the country was facing in year 2007. In fact, in January 2007, Ben Bernake felt that one of biggest risks was the country would have the economy which would be stronger than what was expected. The interest rate was at 5.25% and thought process was raising the rate instead of easing the monetary policy. It was at that time that Federal Reserve should have increased money supply thus lowering the interest rates. Yet it was not until the September 2007, that Federal Reserve lowered the rates to 4.25%. However, that was very late. The initial thinking proved to be very faulty because in December 2007, United States fell into Great Recession. This stirs up my mind because any thinking of the financial professional it should have been able to see where economic status of country was headed. The handwriting was on wall, so to speak. Thus, it appears that it maybe that the Federal Reserve responds more to political environment rather than true financial situation of country
Assess how investment decisions are influenced by expected future interest rate movements, indicating any confounding factors by investor habits and the resulting impact on the investment markets.
The level of the interest rates is determined by the various economic factors. An interest rate is the combination of (1) long-run base rate, (2) the various factors including inflation that affect short- run supply and the demand, and (3) The various financial market risks. The long-run base rate and inflation have got an effect on the level of interest rate. Investor's habits could be determined by interest rate. The desire to invest might increase with the lower interest rates. Real output includes return on the investment which, in turn, increases as the interest rates decrease
Grauwe, P. D. and M. Polan (2005), Is inflation always and everywhere a monetary phenomenon? The Scandinavian Journal of Economics, Volume 107(2)
Christensen, M. (2001), Real Supply Shocks and the Money Growth-Inflation Relationship. The Aarhus School of Business, Fugleman's Alle 4, DK-8210 Aarhus V. Denmark.