Why Does the Fed Lower Interest Rates?
When Alan Greenspan (former U.S. Federal Reserve Bank chairman) lowered the Fed funds rate starting in July 1990, his stated purpose was to “offset the unusual tightening of credit by commercial lenders,” in short, to keep the economy from slipping into a recession. By September 1992, the Fed funds rate had dropped to 3%, where it stayed until February 4 1994. As a result of the low returns available in banks, investors put their money into the stock markets. In December 1996, Greenspan noted the “irrational exuberance” in the markets (a building bubble), and tried to dampen the exuberance by haltingly raising the Fed funds rate (eventually reaching 6.5% in May, 2000—see chart). Finally, with the NASDAQ peaking at 5132.52 on March 10 2000, Greenspan succeeded in bursting the stock market bubble with his higher interest rates. With the economy heading for a recession, Greenspan once again lowered interest rates. When we consider that the economy was already slowing, and we add to that t
