A growing economy produces strong investment markets. The opposite is true as well: When the economy falters, markets weaken.
To understand the cycle of strong and weak markets, you need to understand why growth occurs, how it can stall, and what can be done to stimulate new growth.
The economy has a natural capacity for growth. As the work force expands and becomes more productive, businesses can supply more goods and services. As long as the marketplace generates strong enough demand for these goods and services, the economy will continue to grow.
If demand grows too slowly, businesses cut back production. Then, people have a hard time finding jobs, and unemployment rises.
But if demand grows too fast, that causes
problems too. It pushes up prices, and over the long term can
trigger an inflationary spiral. Once that happens, it takes drastic
action to bring the economy back into balance. Such drastic action
is likely to create a
recession,
and the very threat of recession undermines economic growth.
No one wants to see high unemployment or
runaway inflation. We would much rather have strong, steady economic
growth. That’s the key to providing people with good job
opportunities and a rising standard of living. A good monetary
policy can help achieve that goal. In the U.S., that job falls
to the Federal Reserve System.
Anthony Santomero, Federal Reserve Bank of Philadelphia
In the money
Monetary policy is the management of the money supply. Fiscal policy is the management of spending and taxation. The Federal Reserve is responsible for the former and Congress for the latter.
