NEWSWIRE - September 7, 1999

Topic: The Federal Reserve, interest rates, and stock prices.

References In Texts:

Fundamentals of Financial Management, 8^th edition, Chapter 4. Fundamentals of Financial Management: Concise Edition, 2^nd edition, Chapter 4.

Financial Management: Theory and Practice, 9^th edition, Chapter 4.
Intermediate Financial Management, 6^th edition, not covered.

Source: "Street Watches Fed, and Vice Versa," by E. S. Browning, Wall Street Journal, Tuesday, September 7, 1999, page C1.

Synopsis of Article: The article discusses the current speculation over whether or not the Federal Reserve Bank will raise interest rates for the third time this year. As investors in the stock market try to anticipate what Alan Greenspan and the Fed will do at their October meeting, the Fed is also watching the stock market for clues about future inflation. The article offers an opportunity to discuss the current financial environment and the interaction between the economy, inflation, interest rates, and stock prices.

Questions:

1. How do inflation and interest rates affect stock prices?
2. Why are investors in the stock market watching wages, producer price data and the consumer price index?
3. Why is the Federal Reserve watching the stock market as an indicator of future inflation?
4. How can the yield curve be used to address the debate over likely Federal Reserve action in October?

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