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Money and Financial Markets

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Although the Federal Reserve sets the federal funds rate and the discount rate, the ultimate impact on the economy depends on what happens to other interest rates, which policy may influence but not control. The yield curve shows what has happened across the spectrum of long- and short-term rates. The most notable change has been the flattening of the yield curve since last year: Short rates have risen, but long rates have fallen. This has brought the spread between the 10-year and three-month Treasuries down from historical highs approaching 4% to the vicinity of 1%, slightly below the historical average. This spread has achieved some notoriety as a recession predictor, and, despite its steep fall, its current level suggests positive growth in the upcoming year.


Suggested citation: “Money and Financial Markets,” Federal Reserve Bank of Cleveland, Economic Trends, no. 05-07, pp. 06-07, 07.01.2005.

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