South-Western College Publishing - Economics  
Feds Holding Steady
Subject Interest Rates
Topic Monetary Policy
Key Words Interest Rates, Monetary Policy, Unemployment, Economic Growth
News Story

After raising interest rates three times since September, the Federal Reserve decided at this month's meeting to leave interest rates unchanged. The Fed's decision was expected. U.S. economic growth has been surprisingly strong in the closing months of 1998. Third quarter economic growth was 3.9 percent, and the unemployment rate decreased in November to 4.4 percent. Although many forecasters expect the economy to slow in the early months of 1999 and the Fed to lower interest rates once again, the resilience of the economy may make another rate cut unnecessary.

Turmoil in the world's financial markets, a precipitous decline in the U.S. stock market, and weakness in many Asian economies, were the reasons the Fed cited for interest rate decreases. The rate cuts succeeded in restoring financial stability, and the stock market and the U.S. economy have grown vigorously. Few analysts nonetheless would conclude that the world's economic crisis is over. The impact of manufacturing weakness resulting from a decline in exports could slow the economy in the first half of 1999. U.S. financial markets are still not fully recovered.

The Fed's evaluation of current conditions is summarized in the statement it released, observing that "financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued."

(Updated January 1, 1999)


1. What is the composition of the Fed's Open Market Committee?
2. How does the Federal Reserve execute a change in monetary policy?
3. What problems may arise if the Fed lowers interest rates when a decrease is not needed?
4. What problems may arise if the Fed decides to hold interest rates steady and a change is needed?

Source David Wessel, "Fed Decides to Leave Interest Rates Unchanged", The Wall Street Journal, December 23, 1998

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