ulation of the money supply, the Federal Reserve can cause interest rate changes on a somewhat delayed basis. Through the setting of the discount rate and the interbank borrowing rate, the Federal Reserve can exert a more immediate impact on interest rates.
In the development and implementation of fiscal policy, both the President and the Congress also can affect interest rate levels. Heavy deficit spending, which has occurred at historically high levels since the advent of the Reagan presidency in 1981, places pressures on the capital markets, which, in turn, often lead to interest rate increases.
Federal Reserve monetary policy actions designed to control inflation may be viewed as positive factors for the economy,
4J. G. Whittikar, "Pricing Interest Rate Swaps in An Options Pricing Framework," Federal Reserve Bank of Kansas City Working Paper, RWP 87 02, May 1987, 34.
5Shawn M. Forbes, and Allen Wilhite, "The Prime: More Myth Than Reality," Journal of Consumer Bank Lending 73 (August 1991): 42 46; Christopher J. Niggle, "Monetary Policy and Changes in Income Distribution," Journal of Economic Issues, 23 (September 1989): 809 822. because such policies cause a moderation in the rise of factor prices. Conversely, however, such policies often produce other outcomes such as higher interest rates and higher unemployment which are detrimental to the economy.6
Monetary and fiscal policies, thus, can and do exert a significant impact on the economy. In many instances, the effects of such policies are either not as intended by the policy makers, or are the somewhat incidental side effects of policies designed with some specific end in mind other the effects that occurred. In the early 1970s, the Federal Reserve loosened the money supply, and President Nixon and the Congress increased federal spending, in policy actions designed to stimulate a depressed economy. In the mid 1970s, the Arab Oil Embargo sent prices u...