US Monetary Policy In 1995 Essay Research

U.S Monetary Policy In 1995 Essay, Research Paper

U.S Monetary Policy in 1995

When Alan Greenspan presented the Federal Reserve’s semi-annual report

on monetary policy to the Subcommittee on Domestic and International Monetary

Policy, the Committee on Banking and Financial Services, and the U.S. House of

Representatives on February, Dr. Greenspan touted a cautionary yet favorable

view of the U.S. economy. He states that “With inflationary pressures

apparently receding, the previous degree of restraint in monetary policy was no

longer deemed necessary, and the FOMC consequently implemented a small reduction

in reserve market pressures last July.” (Greenspan, 1996, Speech)

During the Summer and Fall of 1995, the economy experienced a

strengthening of aggregate demand growth. According to Greenspan, this increase

in aggregate demand brought finished goods inventories and sales into near

equilibrium. The Fed’s fine tuning of the economy seemed to be paying off.

Greenspan had a positive outlook for the economy for the rest of 1995. He

states “the economy, as hoped has moved onto a trajectory that could be

maintained–one less steep than in 1994, when the rate of growth was clearly

unsustainable, but one that nevertheless would imply continued significant

growth and incomes.” (Greenspan, 1996, Speech)

Towards the end of the year, the economy showed signs of slowing.

Fearing a prolonged slowdown or even a recession in the economy, and with

inflationary expectations waning, Chairman Greenspan and the Federal Reserve cut

rates again in December. (Greenspan, 1996, Speech)

There are, of course, critics of 1995’s monetary policy. Most of the

criticism came in the early part of 1995 when the Fed raised rates again.

In the article “Are We Losing Altitude Too Fast” from the May 1, 1995

issue of Time magazine written by John Greenwald, he explains that the economy

might not be coming in for a “soft landing” like the fed predicts. Trying to

sustain 2 to 3 percent growth might lead us into a recession. Mr. Greenwald

explains how the Fed’s actions in 1994 and early 1995 has hurt individuals and

the economy as a whole. “Corporate layoffs are far from over,” says Greenwald,

“they generally accelerate when firms find themselves in an economy that is

weakening.” (Greenwald, Time, 5/1/95, p80)

Unemployment and layoffs aren’t the only thing to worry about according

to Mr. Greenwald. The automobile industry and the housing markets are both

getting hit in the pocket books. Paul Speigel, owner of a New York car

dealership explains his woes by saying ‘”We’re doing our best to keep up the

volume by discounting, working on our customers, but the Fed’s rate hikes have

dampened the ability of many Chevrolet customers to buy that new vehicle.”‘

John Tuccillo, chief economist for the National Association of Realtors states

that the market (for new housing) “fell apart as mortgage rates rose above 9%

last fall (1994), and still have not yet recovered.” (Greenwald, Time, May 1,

1995. p81)

Another outspoken, and cynical opponent to the Fed’s monetary policy is

Dr. Michael K. Evans, who is president of Evans Economics, Inc. and Evans

Investment Advisors, Boca Roton, Fla. Dr. Evans wote an article in the Aug. 21,

1995 issue of Industry Week entitled “The Gang that Wouldn’t Shoot Straight:

Fed’s Trample Over Their Own Rate Cut.” Dr. Evans contends that lowering the

federal funds rate in July was a mistake because the economy was already

starting to recover without tampering by the Fed. He claims Greenspan knew full

well that the economy was on the upswing, but cut rates anyway to try to ensure

his reappointment come March 1996. Dr. Evans claims that vice-Chairman Alan

Blinder also knew of the recovery but “he could not face his collegues at

Princeton when he returned, unless he pushed for a rate cut.” (Evans, Industry

Week, Aug. 21, 1995. p122)

Dr. Evans concludes that the Fed’s actions in July were “purposely

misleading, cravenly political, and just plain stupid.” (Evans, Industry Week,

Aug. 21, 1995. p122)

Many people applauded the actions of the Fed in 1995, and defend them

from the rampant “fed-bashing”.

One of the defenders of the Fed’s monetary policy and Alan Greenspan is

Rob Norton who wrote an article in the July 24, 1995 issue of Fortune entitled

“The Blaming of Dr. Greenspan. (Federal Reserve Board Chairman Alan Greenspan

Takes Blame for Economic Downturn).” Mr. Norton agrees with Greenspan that in

February 1995 it was essential to raise interest rates because of an

unsustainable rate of growth. He says that Greenspan was ahead of the game by

doing this. “The conventional wisdom crowd claimed that here was no reason to

fear that the economy was going to overheat,” he goes on to say “By the fourth

quarter of last year, real GDP was growing at a 5.1% rate–twic

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