Dazed and confused
Tuesday afternoon the Federal Reserve Board decided to leave interest rates unchanged at 1.75 percent again. Although this was expected, it was a surprise to hear of the dissents by two of the 12-person board. This dissension by two members seemed to send the stock market plummeting again to its lowest mark since 1998.
Although I do not even pretend to be an expert on the economy, it seems
to me that there is an air of uncertainty about the near future of the
However, right now the U.S. has its largest trade deficit ever, more than five percent of domestic output. This is one of the reasons why the Fed has been able to keep the interest rate this low for so long. The Fed usually has to increase the interest to attract investment from around the world during hard economic times, but U.S. products and companies have been able to attract investors despite low interest rates. This is probably because the U.S. is the only economy that has continued to expand. However, if foreign investment begins to drag, this will be bad news for the U.S., as the value of the dollar could plummet, as a result of increased interest rates to counteract lack of foreign, giving rise to inflation, and further economic woes. Unfortunately the drop in foreign investment has already begun with foreign waning in light of the troubles surrounding corporate malfeasance.
In addition to this there is concern that the strongest sector of the
economy during the recession, the housing market, may be beginning to
fade itself. Even though the housing market is expected to set record
highs this year, existing housing sales dropped by 1.7 percent in August
signaling troubles in that sector. If the housing market falls through,
and the rest of the economy does not pick up the slack, this could be
disastrous for the economy.
Furthermore, President Bush's chief economic advisor, Lawrence Lindsey, Class of '76) said that a war with Iraq would cost the U.S. $100 billion, but Lindsey believes that this wouldn't lead to another recession.
This uncertainty about the future price of oil and the overall state of the economy has most likely left investors very uncertain about what to do with their money. This is reflected in economic analysts lowering their fourth quarter estimates for the economy.
Federal Reserve Board Chairman, Alan Greenspan, also said that he did not think that a war with Iraq would lead to another recession. However, the dissent by two of the members of the Federal Reserve Board indicates that some don't share Greenspan's certainty about the economy.
It appears that the economy is walking a thin tight rope right now that could e broken by many factors. This apparent instability of the market is probably why so many experts are in opposition and most investors are in a daze. If current conditions hold, the economy could see a recovery in the near future, but if any conditions change, the economy could slip back into another recession that would probably be longer and worse than the last one.