Interest Rates Come Tumbling Down; Lower Discount Rate Seen as Weak Medicine

By Holland, Kelley | American Banker, November 7, 1991 | Go to article overview

Interest Rates Come Tumbling Down; Lower Discount Rate Seen as Weak Medicine


Holland, Kelley, American Banker


Interest Rates Come Tumbling Down

Lower Discount Rate Seen as Weak Medicine

By reducing two key interest rates on Wednesday, the Federal Reserve signaled its determination to recharge the economy. But some experts doubted the move would have the intended result.

The Fed cut the discount rate rate to 4.5% from 5% and reduced its target rate for overnight fed funds to 4.75% from 5%. Banks borrow from the Fed at the discount rate and lend overnight to each other at the fed funds rate.

Dozens of banks took a cue from the Fed and cut their prime lending rates to 7.5% from 8%.

Bush administration officials applauded the moves, which were expected for nearly a week.

"Lower interest rates will provide stimulus for economic growth, spur incentive for business investment, and increase consumer confidence," Treasury Secretary Nicholas Brady said in a prepared statement.

The long-term bond market displayed less enthusiasm. Although short-term rates fell, long term rates barely moved. The 30-year bond was trading at 8% Wednesday afternoon, two basis points below Tuesday's.

A Sharp Yield Slope

The yield curve is now more steeply sloped than it has been in years - "a ski slope," according to one economist.

That means investors are still worried about the high volume of government borrowing and the long-term outlook for the debt-heavy U.S. economy. They are going to continue to demand high rates on long-term securities, thereby keeping interest rates at levels guaranteed to put a damper on capital spending.

"The financial imbalances in our economy will simply take time to work themselves out," said Henry Engler, a vice president and money market economist at Chemical Banking Corp. "The accumulation of debt in the 1980s was high, and it will take a number of years for households and businesses to rebuild their balance sheets."

No Long-Term Lever

The Fed has no direct means of influencing long-term rates, which are governed by factors such as investors' worries about inflation and the supply of Treasury securities. And the government's large and growing deficit is being financed with huge sales of Treasury notes and bonds.

As a result, the yield on the 30-year Treasury bond is down just a quarter of a point since the beginning of the year, compared with a drop of two-and-a-half percentage points in the overnight fed funds rate. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Interest Rates Come Tumbling Down; Lower Discount Rate Seen as Weak Medicine
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.