Trends in Interest Rates

The Federal Reserve sets interest rates by mandating the rates at which Federal Reserve banks loan funds to other institutions. These rates then affect the rates of those institutions as they seek to maintain their profit. Thus an increase in rates by the Federal Reserve results in an increase in interest rates charged to customers by financial institutions throughout the nation. Investors may, in this instance, move some funds out of other investments in order to take advantage of the higher rates (such as moving out of bonds), and the stock market may see a decrease in value as investors weigh the effect of the interest rate increase on corporate borrowing.

The Federal Reserve seeks to protect the integrity of the nation's money by providing a healthy banking and financial system that is consistent with price stability and

. . .
the interest rate and expected inflation, all of the explanatory variables are divided by variable [Y.sub.t], the actual level of GNP in the economy in quarter t. Variable [Y.sub.t] is a standard measure of the size of the United States economy. We divide variables by [Y.sub.t] for two reasons: first, it allows for the secular growth over time of variables in the system; second, government purchases, the budget deficit, open market operations, and net capital inflows should be judged relative to the size of the economy so that we have a relevant criterion against which to evaluate them and their magnitude. The reduced form equation to be estimated is given by: (5) [R.sub.t] = a + b[G.sub.t]/[Y.sub.t] + c[D.sub.t]/[Y.sub.t] + d[M.sub.t]/[Y.sub.t] + e[P.sub.t] + f[NCAP.sub.t]/[Y.sub.t] + u where: [R.sub.t] = The nominal average interest rate yield in quarter t, expressed as a percent per annum; a = Constant term; [G.sub.t]/[Y.sub.t] = The ratio of the seasonally adjusted federal government purchases of goods and services in quarter t to the seasonally adjusted GNP in quarter t, expressed as a percent; [D.sub.t]/[Y.sub.t] = The ratio of the seasonally adjusted total federal budget deficit (National I
. . .

Some common words found in the essay are:
BANK YORK, Federal Reserve, Yield Curve, DATA OMITTED, YIELD MATURITY, Latin American, Bretton Woods, Prime Rate, Russek Wohar, Iden Russek, budget deficit, federal budget, capital inflows, percent level, budget deficits, international capital, seasonally adjusted, federal reserve, federal budget deficit, expected inflation, long-term rates, international capital inflows, net international capital, net capital inflows, federal budget deficits,
Approximate Word count = 8274
Approximate Pages = 33 (250 words per page)

More Essays on Trends in Interest Rates