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Originally posted by jyl
Just to take your point further, the mechanism the Fed is using is higher rates -> slower economy -> lower inflation. It will be a big bummer if the second link doesn't work as well as it used to. Ultimately the Fed's #1 job is to control inflation - even at the cost of growth.
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I believe Greenspan increased rates in 2000 to deflate the stock market. He was concerned about "irrational exuberance." Remember that?
The market was booming at the time, especially tech stocks. But the Microsoft anti-trust suit killed the tech market. Was the market inflated? Yes--but part of it, I think, was due to the balanced budget achieved by Clinton and the Republican congress. There is far less confidence now with all the deficit spending going on--by the Republicans, who are supposed to be fiscally conservative.
I also think these Fed types have too much influence on the stock market with their inflation rhetoric. They should tone it down. I suspect they've got the message recently.