The Federal Reserve Board

The Fed changes interest rates in order to stimulate or slow down the economy. If the Fed thinks that the economy is headed for inflationary times, it will increase short-term interest rates in order to slow down economic activity and thus prevent inflation. Higher interest rates do this because they increase the cost of funds to banks, which then increase the interest rates they charge customers. This effect ripples throughout the economy with the result that borrowing (and the capital expenditures that borrowing supports) decreases and the economy is slowed.

Similarly, the Fed can decrease interest rates in order to stimulate the economy. This results in decreased interest rates from banks t

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ed States, but enjoy an international presence. Their capital resources are vast, and their capital investments equally large. The increase in interest rates did not severely affect any of these stocks, however (either positively or negatively), which casts doubt on the theory that capital-intensive industries are more susceptible to shocks in the financial community. Part of the reason why the stocks were immune to changes in the interest rates may come from the nature of the oil industry itself. While the industry has a high barrier to entry because it requires large amounts of capital financing, once those resources are in place, they are not replaced often; thus the need for additional capital can be met when interest rates are favorable. Cyclical industries, such as agribusiness, which must regularly make infusions of capital, may be more susceptible to changes in interest rates. The following charts illustrate the performance of the various stocks the week before, day before, day of, day following and week following changes in the discount rate.




A company's stock performance is not measured in a few days' time when discount rates change, but over the long-term, at least when the companies in question a
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Approximate Word count = 2834
Approximate Pages = 11 (250 words per page)

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