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Money and Financial Markets

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One reason the federal funds rate gets such intense scrutiny, even though few people directly borrow and lend at that rate, is that Federal Reserve policy affects other rates as well. But the connection is not as tight as is often supposed. Since 1989, lowering the fed funds target has usually been accompanied by lower interest rates in other markets, but not always. Even the three-month Treasury bill, thought to be quite sensitive to monetary policy, increased 20% of the time when the target rate fell 25 basis points (bp). The 10-year rate shows an even higher proportion of such opposite moves. Digging deeper into the data may reveal more consistent patterns, depending on whether the change was anticipated or unanticipated, which part of business cycle the economy is in, or the slope of the yield curve.

Suggested citation: "Money and Financial Markets," Federal Reserve Bank of Cleveland, Economic Trends, no. 04-05, pp. 06-07, 05.01.2004.

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