Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Problem 7

In mid-2017, an article in the Wall Street Journal noted that "the Federal Reserve's interest-rate increases aren't having the desired effect of cooling off Wall Street's hot streak where stocks have rallied to records this year." Is cooling off rapid increases in stock prices part of the Fed's dual mandate? Are such increases a concern for the Fed? Briefly explain.

Short Answer

Expert verified
No, cooling off rapid increases in stock prices is not part of the Fed's dual mandate. However, such increases can be a concern for the Fed as they could indicate potential economic instability, which could in turn affect its dual goals of stable prices and maximum employment.

Step by step solution

01

Understand the Federal Reserve's mandate

The Federal Reserve operates with a dual mandate - to manage inflation (stable prices) and to promote maximum employment. The mandate does not directly involve the monitoring or regulation of fluctuating stock prices. Hence, 'cooling off rapid increases in stock prices' is not explicitly within the Fed's dual mandate.
02

Evaluate the relationship between interest rates and stocks

However, the operations of the Federal Reserve often indirectly affect stock prices. For instance, increasing the interest rate usually results in less borrowing due to the higher cost of loans. This can lead to a slowdown in business growth and subsequently affect stock prices. Therefore, the Fed's interest rate policies do indirectly influence the stock market.
03

Determine the Fed's concern for increasing stock prices

Even though it's not within their direct mandate, the Federal Reserve does monitor the stock market closely. Rapidly increasing stock prices could indicate potential economic issues such as asset bubbles. If these bubbles burst, it could lead to economic instability and consequently affect the Fed's dual goals of stable prices and maximum employment. Therefore, such rapid increases can be a concern for the Fed.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the \(1930 \mathrm{~s}\)

What do economists mean by the demand for money? What is the advantage of holding money? What is the disadvantage? Why does an increase in the interest rate decrease the auantity of money demanded?

What is a monetary rule, as opposed to a monetary policy? What monetary rule would Milton Friedman have liked the Fed to follow? Why has support for a monetary rule of the kind Friedman advocated declined since \(1980 ?\)

The European Central Bank (ECB) issued the following statement after its June 2017 meeting on monetary policy: Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of \(€ 60\) billion, are intended to run until the end of December \(2017,\) or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. a. What is this nonstandard monetary policy of net asset purchases called? What other central banks have used it? b. Based on this statement, do you expect that the inflation rate is above or below the ECB's inflation target? Briefly explain.

How can investment banks be subject to liquidity problems?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free