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What are the most important factors in the Fed's interest rate decision?


Here is the "official" word right from the horse's orifice (pick an end) ...


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Despite its half-percentage-point interest rate cut on January 3, 2001, the Federal Reserve must quickly make even deeper cuts to lessen the damage it has done to the economy. In each of the past two recessions, the Fed cut real interest rates by five to six percentage points before unemployment began to decline. Given this history with past recessions, the Federal Reserve should reduce interest rates by at least two to three percentage points within the next year. Without swift action by the Fed, unemployment is likely to rise by at least one to two percentage points, if the economy follows the pattern of previous recessions.
The Fed's sharp 1.75 percentage-point hike in interest rates in 1999 and 2000 has slowed the economy and may even tip it into a recession. Rising energy prices, stock market instability, and several other important factors suggest that the risk of a U.S. recession is great. Since there are no signs of a significant, economy-wide increase in inflation, prices and wages are unlikely to surge if the Fed cuts interest rates this year. Even if the U.S. avoids a recession, a relaxation of Fed policy now will not damage the economy.
Sharply rising interest rates usually cause recessions
Although each recession is unique, they seem to share some patterns. First, interest rate increases by the Federal Reserve's Open Market Committee (FOMC) have been one important cause of recessions, with sharp increases in real (inflation-adjusted) short-term interest rates heralding a slowdown.1 Second, months or years after interest rates peak, growth slows, real output actually falls, and then unemployment begins to rise. These patterns are apparent in both of the recessions that took place between 1979 and 1994.

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