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July 24, 2008

Big decisions for the Fed

Recently, the stock market took a big hit, and some say part of the reason was a concern over what the Federal Reserve might do next. What is it about the Federal Reserve that is troubling investors? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first of all, people have to realize the Federal Reserve has two goals. They want to promote economic growth in the country, but they also want to promote price stability. Now, recently, they've been focusing on the growth part of the equation. With all the problems in the housing market, the credit markets, the slowdown in the economy, they have been trying to keep the economy out of recession and focusing on stimulating growth by cutting interest rates. Now, however, they are worried - they're shifting their focus somewhat to the other goal - and that is price stability, because they are worried about rising inflation. And so what the Fed recently did is they hinted - and it can only take a hint from the Fed to move markets - they hinted that somewhere down the road, in the near term, maybe the end of the year, the beginning of next year, they may raise interest rates, which would, of course, be totally contrary to what they've been doing over the last year and a half. Now, investors, particularly investors in the stock market, view this as bad because generally speaking higher interest rates hurt stock prices. Also investors are worried that we may not be able to have both of those goals or either one of those goals met, that we may actually get high inflation and low growth, something we call stagflation. So right now, a lot of focus is on the Fed, what they're going to do in the upcoming months, and that impact on the stock market."

Posted by Dave at July 24, 2008 08:00 AM