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NEW YORK (AP) - Oil prices fell substantially last week, yet the stock market dropped to its lowest levels since early July. People who are used to seeing stocks rise as oil prices fall could very well wonder what happened. Richard Fisher happened.
Fisher is the president of the Dallas Federal Reserve Bank and, as such, sits on the Federal Reserve's committee that sets interest rate policy. In two speeches last week, Fisher said inflation was rising near the high end of the Fed's tolerance level. Inflation, of course, is bad for the economy because consumers would have to pay higher prices for goods and services and would thus consume less.
The Fed's chief weapon against inflation is interest rates. By raising the nation's benchmark rate, the Fed makes it more expensive for corporations and individuals to borrow money. Business can't fund expansion as cheaply, and consumers pay more on their credit cards and variable rate mortgages. Prices remain stable, but the economy slows and corporate earnings shrink, making stocks less valuable.
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