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Money and Financial Markets

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Starting in mid-1999, the intended federal funds rate first was raised from 4.75% to 6.5% in six steps and then was cut sharply to 4.5% in four moves of 50 basis points (bp) each. When the FOMC changes the intended fed funds rate—the rate at which banks can borrow reserve balances from each other overnight—it is often said simply to be “lowering interest rates.” In fact, the entire array of other interest rates is determined by participants (lenders and borrowers) in a wide variety of financial markets, and individual rates can move with or opposite to the target rate. It is true that the intended funds rate and market interest rates, especially short-term rates, tend to follow the same general pattern. However, it is not uncommon to see some market rates moving in the opposite direction from the policy rate, even over fairly long periods.

Suggested citation: "Money and Financial Markets," Federal Reserve Bank of Cleveland, Economic Trends, no. 01-05, pp. 05-07, 05.01.2001.

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