The Golden Revolution, Revisited: Chapter 8
Things were looking rather grim for the US economy in mid-1987, soon after Paul Volcker left his job at the helm of the Federal Reserve. The dollar was falling, fast. Inflation and inflation expectations were rising. It was clear that the Fed was going to need to start raising interest rates soon, perhaps sharply. Having successfully broken the relentless uptrend in consumer price inflation and supported the dollar in the early 1980s with explicit monetary targeting, double-digit interest rates, and the most severe post–World War II recession to date, financial markets were naturally increasingly fearful that the Fed might follow a similar if less severe script again. While the exact trigger will perhaps never be known, this was the fundamental economic backdrop that led to the great stock market crash of October 19, 1987, when the Dow Jones Industrial Average declined by 23 percent (Figure 8.1).1
Alan Greenspan, a veteran of US economic policy-making circles but a neophyte at the Fed, sensed correctly that an emergency easing of interest rates and other liquidityenhancing measures would help to restore confidence in the equity market, financial system, and economy generally and prevent a possible recession. Sure enough, equity markets bounced sharply in the following days and continued to climb steadily in the following months, recovering all losses with what seemed little effort. This episode was most certainly a baptism by fire for Greenspan and one that, no doubt, taught him at least one important lesson: if done quickly and communicated properly to the financial markets, emergency Fed policy actions can provide swift and dramatic support for asset prices. But at what cost?
Read the full article on GoldMoney.com