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The current state of the economy is heading back into a recession. However, I would advise Mr. Greenspan to leave interest rates alone and allow the economy to recover on its own, which is very probable. The March employment report is evidence that the economy is contracting. In addition to a decrease in employment, industrial production and spending are also decreasing. If the current economic conditions continue for much longer, the economy will go back into a recession.
However, the current weakness is dominated by Iraq uncertainty, the reason the central bank basically refused to even declare a policy bias. Whatever damage the Iraq war is doing to the economy, it is unlikely that a small cut in interest rates can make a difference. Given the fact that the federal funds rate is already at just 1.5%, investors and executives want to retain some type of back up in the event of an actual financial market crisis. Keeping all this in mind, a cut in rates cannot be ruled out. Even if Fed members see a benefit from a cut, they will be willing to reduce rates if confidence decreases anymore with investors and consumers.
I believe that Mr. Greenspan should leave the interest rate alone.As of right now the economy is actually in good shape despite the war with Iraq.It may seem like a good idea to lower the interest rates in the short run but when the long run is taken into consideration there is really no reason to change the current policy. Leaving the interest rate at its present level, it will be maintaining a stable long-term price, keep inflation at a low level, and hopefully keep unemployment at its current level.With these three factors in mind it makes sense to maintain the current interest rate because the three goals of monetary policy are to maintain long-term price stability, high levels of production, and a high level of employment.All of these things will most likely take place if Mr. Greenspan is to leave the interest rate alone. The investor and consumer confidence will begin to strengthen as the war with Iraq continues to go quickly and in our favor.With this increased consumption the firms will have the means and feel more comfortable with investing again.As the firms begin to invest more and more it will increase efficiency and make it possible for them to also lower their prices.In turn, with the lowering of their prices the firm will then be able to increase their output. With an increased output the firms will increase employment to keep up with the output demand. This will cause a slight inflation but with the inflation so low already the slight change will bring it to, at most, an average rate.
However, leaving the interest rate the current level does have its risks.If the expected outcome with the war with Iraq does not pan out the economy, which is already on the edge of a recession, will definitely fall into a recession. If the economy does not recover on its own after leaving interest rates alone it will take over a year for it to recover after the policy is enacted.This "lag" in the economy might cause the Fed to in turn ease its policy and stimulate the economy. As the federal funds rate falls, other short-term rates decrease, and this effect will ultimately affect the entire economy over a certain time. Banks can allow firms to increase investment and economic activity. Then the banks can supply more credit at lower borrowing costs. As investment and economic activity increases, output will rise and will unemployment fall.
Overall, Mr. Greenspan should put his faith in his country and leave the interest rates alone. The war with Iraq is expected to end very soon and will in turn put in a much-needed new life back into the economy.Consumer and investor confidence will increase which will stimulate the economy and benefit the country as a whole.
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