Volcker Reveals Fed Tightened Credit: Action Could Reassure Jittery ...
Federal Reserve Chairman Paul A. Volcker, in an unusual disclosure, said yesterday the central bank has tightened monetary policy to support the value of the dollar and calm the recent turmoil in financial markets.</br></br>The Fed action to make cash less readily available to the banking system normally would mean higher interest rates. But in the nervous climate of financial markets during the past few weeks, the Fed decision could reassure investors that it is willing to act to protect the dollar and resist inflation, analysts said.</br></br>In the past month, a number of rates, including those on home mortgages and long-term U.S. government bonds, have gone up a full percentage point or more in highly volatile market conditions.</br></br>The rate increases were set off by a sharp decline in the value of the dollar on foreign exchange markets as a trade dispute heated up between Japan and the United States. These events in turn fed fears of higher inflation.</br></br>As U.S. interest rates go up and those abroad go down, foreign investors are more likely to put their money in the United States. To do so requires that they buy dollars, which helps boost the dollar's value relative to the currency they sell. A major factor in the dollar's decline has been a reluctance of foreign investors to continue to provide the capital needed to finance the large U.S. trade deficit.