Interest Rates and the Stock Market

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 among banks, usually overnight). Since the funds rate represents the cost of day-to-day funds for banks and securities dealers, its movements foreshadow changes in the prime lending rate and other money market interest rates: "A central bank is a man-made institution that deliberately creates money by means of some kind of governmental prescription or license" (Timberlake, 1993, p. 411). Movement in the cost of overnight funds triggers movement in more publicly visible rates such as the prime and the Treasury bill rate. The Federal Reserve discount rate also tends to follow these other rates albeit often with a lag.

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ve could be certain that productivity is within normal limits, low unemployment would not be so troublesome. When there is too much money in the real economy (caused by low unemployment) demanding too few goods (the result of decreased productivity), the stage is set for price inflation. Low unemployment is usually accompanied by wage increases, another forerunner of inflation but the economy appears to be shrugging off employment gains, "[Greenspan] is heartened that the economy was able to swallow a hike in the federal minimum wage without so much as an inflationary hiccup" (Foust, 1997, p. 46) The fact that both prices and wages have remained at levels that would normally have triggered inflation in the past has led some economists to conclude that fundamental changes have occurred in the economy. As one expert puts it, "The economy seems to be moving off the maps as we know them" (Miller, 1997, p. 50). The new economy is characterized by increased economic interdependency among global trading partners, low unemployment, and stable prices. Another characteristic is an unprecedented degree of participation by Americans in the stock market, either through their own stock holdings or those of their pension plans. This part
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Approximate Word count = 2156
Approximate Pages = 9 (250 words per page)

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