Economic Article Summary

Article 1 : Consumers are downbeat on the economy - Sentiment drops to a 28 year low housing starts rise , by Sudeep Reddy

This article reports a fall in consumers ' sentiments about the economy caused primarily by a combined effect of rising inflation as well as an unimpressively performing job market . It also reports a mixed performance of the housing starts in that while housing starts for multifamily apartments and `townhomes ' have been observed to be rising housing starts for single family units have been on the decline

The fall in consumers ' sentiments is

essentially a reflection of falling consumer expectations about the economy . Consumers ' expectations play a very important role in determining the aggregate demand of an economy which in Keynesian theory is admitted to be the primary driver of income and employment growth . This fall in consumers ' expectations about the future performance of the economy has , according to the article been driven primarily by the recent hike in the general price level and unimpressive employment conditions

This rise in the price level has been caused by a sudden oil price shock . This oil price shock has been reflected in the form of rising gasoline prices . This rising price level is significant as it has contributed considerably in raising inflation expectations among the consumers . The true significance of this inflationary situation becomes more apparent once one starts considering the implications this has on the interest rates . Inflations is likely to increase interest rates which itself in turn adversely affects consumer spending . As reported in the article this inflationary situation is likely to make the Fed 's job of reducing the interest rates to the benchmark and further , sustaining that very difficult

The adverse effects of the falling expectations are reflected in the falling housing market starts for the single family units . The rising housing starts for multifamily units are also expected to fall as there has been an accumulation of inventories , which under the present situation are likely to be worked off

Article 2 : Fed asks to Now Pay Interest on Reserves by Greg Ip

This article reports the Fed 's request to accelerate the date since when it is officially permitted to pay interest on reserves . This is essentially a monetary policy that shall allow the Fed better monetary control over the economy

Receiving interest payments on their reserves with the Fed shall motivate the commercial banks to hold more reserves with the Fed rather than lending out the excess reserves for lesser interest rates to the market . This would in turn make maintaining the Fed 's targeted federal-funds rate benchmark of 2 easier by preventing declines in the rate on overnight loans particularly on days when the system is awash in cash

The Fed wants to attain such control on the money market to enhance the operating efficiency in regulation of inflationary trends . The interest payment scheme is primarily targeting a reduction in the excess reserves of commercial banks and enhancing control over credit creation . These are essentially motivated...