sing interest rates eventually weaken economic activity and depress the profits outlook. Conversely, under most circumstances, a decline in the federal funds rate will exert downward pressure on bond yields and, in turn, spark an increase in stock prices. Stock market participants conclude that lower rates not only improve the competitiveness of stocks relative to money market instruments and bonds, but also eventually stimulate economic activity and profits. Mere rumors of a proposed move by the Federal Reserve to raise or lower interest rates can result in volatility in all major financial markets: "Even in a highly competitive market, characterized by high volumes and operating on a global scale, personal contacts and reputations of individual traders and managers play important roles" (Burnham, 1991, p. 124).
Greenspan has repeatedly made it clear that the goal of the Federal Reserve is price stability. Price stability minimizes corporate uncertainty and contributes to sustainable economic growth. Corporate uncertainty tends to inhibit investment because efficient business operations require advanced planning: "To plan production and sales, firms set prices and agree with workers on employment and real wages one period at a time" (Brunner, Cukierman, and Meltzer, 1989, p. 213).
Unanticipated changes in the stability of prices create a period of confusion during which businesses reflect on new information and its impact on production and sales. Corporate managers must consider whether inventories should be reduced or replaced, wage rates adjusted, etc. The speed of response to uncertainty varies depending on the type of business involved and the economic information the business has access to: "It is trickier to spot changes in relative prices if the general price level is rising rapidly . . . So resources are misallocated" ("On the Trail," 1997, p. 77). Regardless of the length of time for evaluation, a period o...