Bus 105 Individual Project


April 20, 2004


STEP 1


In reading the latest update of the Beige Book, I feel the information put out will likely raise the interest rates slightly.


Our economy, although still week, seems to be improving. Industry and agriculture seem to be expanding. Growth in the some Districts are said to be moderate, while others are said to be accelerating. Consumer spending is stated to be strong or strengthening.


The service industry has shown rising activity. Some of the Districts have noted increased demands for information technology, insurance, and healthcare. Others such as financial services and transportation eased. The entire technological field seems to be headed in the right direction with activity rising in most Districts.


Real estate does not seem to be changing in any direction at this point. Some regions have stayed steady while others have shown a slight increase or decrease. Residential real estate markets continue to be strong in the majority of the Districts. Recent gains in home building and housing demand have been high for most Districts.



STEP 2


I find that most economists feel inflation will reach 3% to 4% by the end of the year (Http:www.time.com). Most experts fell the economy is currently in good shape but remains fragile.


An editor from the Washington Post feels the economy is strong, but also feels some consumers (middle and lower class) will be affected a great deal by higher interest rates. He feels that once car buyers are no longer getting interest free deals, and homeowners are getting hit with higher mortgage rates and credit card bills, consumer spending might be hurt. (Http:www.Washingtonpost.com).


Financial markets have already sent longer term rates upward. U.S. Treasury notes hit 4.34% yesterday compared to the 3.85% six weeks ago. Forecasters are predicting mortgage rates to rise to 6.5 to 7.5 percent. This will cool down the housing market, which will then affect the rest of the economy, possibly causing the lower to middle class to spend less.


From the opinion polls in the New York Times, one person writes:


"The Feds primary roles should be regulation of interstate commerce, international trade treaties, and protecting our country from foreign invaders (Http:www.nytimes.com).


I totally agree with the statement. I think by limiting foreign trade, the job market will rise and cause the American Dollar to keep worth. The more we allow countries to import, the less our money is worth.


I think the Fed has no choice but to raise interest rates to control inflation. On the other hand, I do not think it should be a considerable raise. The economy is just starting to pick up again. I do not think they will push for a high raise at this point. Our nation cannot Afford another blow to the economy.


STEP 3


In reading reports and speeches from the Federal Reserve Board, it appeared that the interest rates would be rising. Greenspan talks about the economy growing but never actually states the interest rates would be rising.


It was not until read an article from Http:www.money.cnn.com that I saw his actual intentions. Greenspan states that the Fed can be "patient" in moving its’ target for a key overnight lending rate up from its current level, the lowest it has been in forty years.


His statement, along with others lead me to believe the rates should stay put, at least for a short while.


"Once we get a few strong payroll gains, the tightening cycle will commence," said Steve Stanley, an economist with RBS Greenwich Capital Markets. "That could be three months away or another year away. No one, including Greenspan, knows the time frame; but make no mistake, tightening is coming sooner or later."


That statement leads me to believe I was not completely wrong with my original analyses. The Fed may not raise interest rates a great deal right away, but higher interest rates are inevitable.


STEP 4


The Fed’s interest rate decision effects the whole economy. I feel the most important factors are the competitiveness and success of banks. Consumer spending helps the economy. The Fed does not want to change the formula too quickly or it may slow economic growth. Also, I think the unemployment rate affects their decision. Promise of future employment is not enough. I