Question

In your discussion post, select a 10- to 15-year time period (of your choosing) over the last 50 years. Then explain how the trends and changes of the federal funds rate and/or the discount rate have impacted short-term or long-term interest rates. PLEASE DO THE TIME PERIOD OF THE 2000S

Answer 1

During the 2000s both the federal funds rate and discount rates were reduced below the levels of 2 percent. This was done as the U.S. economy had started deteriorating rapidly in 2001 and to control further fall of economy the then Federal Reserve Board Chairman Mr. Alan Greenspan decided to lower the federal funds rate and discount rates below 2 percent. This action was undertaken to counteract the impact of the slowing economy as reduction of federal funds rate and discount rates led to reduction in the short term interest rates. Long term interest rates were not so impacted as the reduction was through lowering of rates in federal funds market-overnight loans between banks and at the discount window-overnight loans made by Federal Reserve Banks to depositary institutions.

The U.S. economy was already fragile at the start of 2000 and the September 11 attacks further had a negative impact on the economy. These developments urged the Federal board to lower the rates and the lowered rate at 1.25 percent (as on January 2002) was the lowest rate in a decade. The impact of this lowering was felt only for the short term basis and not long term basis as the actions were taken mainly through federal funds market and this market is a market for overnight loans of funds that are immediately available.