produced expectation of higher profit growth, which, in turn, have resulted in higher equity valuations. That surge in equity prices is seen as the primary driver of the “wealth effect”, which he believes has created an “imbalance” between demand and supply, raising inflation pressures (Business Week, The McGraw-Hill Companies, Economic Outlook, March 6,2000). Speculations of this occurrence may over the long term indicate that the higher the trend growth of productivity, the lower the inflation rate—due to the restraint of labor costs. However, in the short-run, if productivity growth jumps rather quickly to a higher level, its impact on demand would outrun the existing supply of recourses to meet that demand. Since supply cannot be increased quickly enough, Alan Greenspan believes demand growth must be brought back into line with supply growth. The concept to achieve a balance, he believes, is higher interest rates. High interest rates have, in fact, reduced home sales, but the overall economy has not cooled enough to reduce inflationary fears. The Fed is still concerned that strong consumer spending will lead to inflation. Right now, much of the strong demand is being satisfied by imports and expanded U.S. production from increased employment (Bank of America, Economic Research, Economic in Brief, November 1, 1999). Nevertheless, the Fed is worried that there may be limits to employment growth or foreign willingness to hold U.S. dollars earned exporting to the United States. Fed policymakers would be much more comfortable if the demand for goods would slow, thereby reducing the risk of the economy overheating or the dollar falling. Recent increases in the price of oil have reached their highest level since the Gulf War, and further increases could hurt U.S. economic growth. With the recent Attacks on America on September 11, OPEC's decision to cut production last March has lead to rising inflation. Con...
