Word: interest
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Dates: during 1970-1979
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Bonds took an especially bad beating, since they usually pay fixed rates of return to investors and have values that fluctuate in accordance with overall interest rates in the economy. When interest rates rise, bond prices go down, and last week they fell through the floor. IBM had an offering of some $1 billion worth of notes and debentures, but many remained unsold when bond prices collapsed last week, leaving the underwriters with a loss of as much as $25 million...
...smokes, not necessarily to the extent of knocking the props out from under profits." Still, the chaos in the markets deflected attention from the more fundamental significance of the Federal Reserve's moves, particularly its shift toward management of the money supply through direct controls instead of manipulation of interest rates. Conservative Economist Alan Greenspan describes this development as "by far the most important and significant change in U.S. monetary policy in a generation," and others concur. Says Carter's chief economic adviser, Charles Schultze: "Whether you like it or lump it, this is one of the most interesting things...
...surge in money growth was precisely what happened last spring. This is a big reason why inflation shows no signs of abating. Ironically, even as then Fed Chairman and now Treasury Secretary G. William Miller was proclaiming a clampdown on monetary growth and pointing proudly to double-digit nationwide interest rates as evidence that the Fed was making it costly to borrow funds, the money supply itself was about to explode...
Miller's mistake had been to assume that the Fed's orchestration of the highest interest rates in five years would alone be sufficient to discourage borrowing and spending. Through the first half of 1979, business was actually slowing somewhat as a result of bad winter weather and the gasoline squeeze, which together put a crimp in consumer purchasing. The Fed even began to fear that its seemingly draconian interest rates were pushing the economy headlong into recession...
Left to itself, the accelerating demand for credit would have quickly pushed interest rates far beyond the target that the Federal Reserve had set. For instance, interest on six-month Treasury bills, which is used as a guide for regulating interest on certain bank deposits, would have leaped alarmingly. To keep money markets stable, the Fed's so-called Open Market Desk in New York was forced to begin making more and more money available to banks in order to satisfy demand for funds. Indeed, though the Fed's own inflation-cooling monetary growth target was 4.5%, which is just...