Class 3

Class 3


Review of class 2

In the summer of 2007, it seemed that inflation was the Fed's primary concern.  The fed fund rate was at 5.25  and  the dollar was weak. We saw the Fed statements from June 28 and August 7 where no change was made to the Fed fund rate. We saw that wall street was starting to feel the impact of the credit crisis and a housing correction.  Defaults on mortgages were rising and  S and P ratings were being changed, the financial sector weakening. Banks were repricing risk and becoming less willing to lend.  We looked at commentary that suggested if Greenspan were Chairman the rate would have already been cut.  And we saw angry ranting from a popular TV host accusing the fed of inaction, in the face of a serious crisis.

Effects of a rate change,

In most books on finance you will read that rate cuts can lead to a
weaker dollar, rising inflation, yet stimulate the economy and
strengthen employment.

18 months later we have a stronger dollar,  deflation, and rising unemployment, yet the fed has made a series of  drastic rate cuts the leaving  fed fund to rest at 1% and perhaps heading lower.

Why is the dollar stronger?  (what is constraining volatility )

What are other factors of deflation/inflation?  how about Core inflation? what about oil?

Unemployment?

What are the other options of the  fed's standard monetary policy, or fiscal policy our only hope?

How did we get here?

Now we will look at these issues starting with the fed's first moves on August 10 and August 17 2007

Summer crunch 2007:  the feds first move, keep the fed funds rate and cut the discount rate

August 10 2007  Fed to provide liquidity ,  Not lowering the Federal funds rate but just trying to get people to trade more closely to it.  (how?) Open market operations, the same way they make the target rate. 

http://www.federalreserve.gov/newsevents/press/monetary/20070810a.htm

Great analysis from PBS   (Audio, video and print)

http://www.pbs.org/newshour/bb/business/july-dec07/markets_08-10.html

 
(What is the difference discount rate, federal funds rate)

Discount rate Statement August 17 2007

http://www.federalreserve.gov/newsevents/press/monetary/20070817a.htm

 Discount rate and you
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/17/AR2007081702067_pf.html

Euro shares and the discount rate

http://www.forbes.com/markets/feeds/afx/2007/08/17/afx4031047.html


Fed cuts rates to unexpectedly to restore markets

http://www.iht.com/articles/ap/2007/08/17/business/NA-FIN-ECO-US-Fed-Interest-Rates.php

Analysis

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/17/AR2007081701503_pf.html



Some news form august 17th


pbs news  hour 

http://www.youtube.com/watch?v=g5711Ixr4PM

reuters

http://www.youtube.com/watch?v=OjwyGuLtyCY

futures market 

http://www.youtube.com/watch?v=aRDoDtY4qGc