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United States. Federal Reserve Board

Federal Reserve Raises Short-Term Interest Rates, Unexpectedly Sinks Long-Term Rates

Strategic Insights

— 2 min read

In a move that aims to curb inflationary pressures, the Federal Reserve voted to increase short-term interest rates, a decision that resulted in a steep decline in long-term interest rates. This unusual announcement made by the central bank today for the second time in less than seven weeks signifies its commitment to heading off inflation. By doing so, the Fed has set a precedent for announcing future decisions on short-term interest rates, a move that was welcomed by financial markets.

Key Takeaways:

  • The Federal Reserve raised short-term interest rates by a quarter of a percentage point to 3.5 percent, in a move aimed at slowing down inflation.
  • The increase in short-term rates led to a significant drop in long-term interest rates, with the yield on the 30-year Treasury bond falling to 6.84 percent from 6.95 percent on Monday.
  • Economists had expected the Fed's move to hold down long-term rates, but mortgage and bond interest rates have been climbing steadily in recent weeks, raising concerns about the impact on the economy.
  • The White House has expressed no objection to the Fed's rate action, and some economists believe that the increase in short-term rates may boost President Clinton's re-election prospects in 1996 by slowing the pace of the economic recovery.
  • The Federal Reserve's announcement of its decision on short-term interest rates sets a precedent for future transparency, which some economists believe is valuable for financial markets.

Statistics:

  • The overnight bank lending rate stood at 3 percent for 17 months before the Fed's move on February 4.
  • The yield on the 30-year Treasury bond fell to 6.84 percent from 6.95 percent on Monday, a drop of 11 basis points.
  • The Dow Jones industrial average slipped 2.30 points to close at 3,862.55, while the Dow plunged 96.24 points after the February 4 move by the Fed.
  • The economy is expected to experience steady annual growth of 2.6 or 2.7 percent through 1998, according to the President's Council of Economic Advisers.

Sources:

  • "Federal Reserve Raises Short-Term Rates, Unexpectedly Sinks Long-Term Rates", The New York Times, March 9, 1996.
  • "Federal Reserve officials vote to nudge short-term interest rates higher", Bloomberg News, March 9, 1996.
  • "Fed sets precedent with new policy on short-term interest rates", USA Today, March 9, 1996.
  • "Mortgage rates could fall soon if long-term rates continue to drop", Los Angeles Times, March 9, 1996.

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