Forecasting interest rates is a difficult task, and yet it is one in which amateur and professional investors engage. Expert opinion is often broadcast or printed in the media, but the responsibility for changing interest rates rests with the board of governors of the Federal Reserve. Interest rates set by the Fed have repercussions throughout the financial markets and business in general, and there is considerable interest among the public as a result. This research examines the mechanisms which influence interest rates, and considers their likely movement in the coming months.
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 sustainable economic growth. This basic mission has not changed for the more than 80 years that the Fed has been in existence (McDonough, 1994, p. 1). 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 pub...