New Economics at the NYT

The NYT told readers that China's central bank is raising reserve requirements rather than the central bank lending rate because it is worried that if raised its lending rate, the higher interest rates would pull more foreign money into the economy. This explanation does not make sense because raising reserve requirements would also lead to higher interest rates.

The mechanism is very simple. Higher reserve requirements reduce the supply of money. A lower supply leads to higher interest rates.

The article also asserted that the Federal Reserve Board signaled that it would raise its interest rates in months, based on strong growth. It certainly is not clear that the Fed has plans to raise interest rates any time soon, although it has not explicitly ruled out this possibility.

It is worth noting that the 5.7 percent growth rate was driven mostly by inventories. Final demand likely grew by less than 2.0 percent after recent revisions to data are incorporated. Few economists are projecting strong growth for the U.S. in 2010.

--Dean Baker

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