The media pays close attention to interest rates, noting when the Federal Reserve Board's Open Market Committee meets, and the stock and bond markets react to real or anticipated changes in interest rates. Yet many consumers do not understand the interest rates discussed by the Fed and the media; what consumers do appreciate is that many mortgages and other loan rates are based on these figures. When interest rates increase, loan rates increase and vice versa. This research explores the likely movement of interest rates (as measured by federal funds and T bills) over the next 12 months, and considers what effect movement in these areas will have on the yield curve. The discussion then turns to an examination of the banking system in the United States and the effect that the anticipated movement of interest rates will have on the banking system.
The Fed's mission is to protect the integrity of the nation's money by providing a healthy banking and financial system that is consistent with price stability and sustainable economic growth. This basic mission has not changed for the more than 80 years that the Fed has been in existence. Although the purposes and functions of the Fed have not changed over its history, the economic, financial and social environment in which the Fed operates has changed. The Fed, as a result, has transformed itself and the way it does business in response to this dynamic environment.
Today, the Fed is a market-driven and customer-driven entity. It has elements of both the public and private sector in its form, functions and operations. Its primary mandate is public policy, which goes back to the fact that it was created by an act of Congress rather than by the private sector. In this way, the Fed can be considered an instrument of the government that utilizes the language and mechanisms of the private sector.
The Fed has held interest rates steady for over 12 months and the economy has move...