Interest Rates as an Economic Indicator

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Interest represents the cost of borrowing money. Thus, interest rates are the price of money. An interest rate, also referred to as a yield, is the annualized percentage that interest is of the principal of the loan. The level of interest rates for different loans reflects the length and risk of the loan. General, short term loans have lower interest rates than long term loans and loans subject to little risk of not being repaid have lower interest rates than those with higher risk. The main exception occurs during periods of high inflation when the Federal Reserve board tightens bank credit to lower the inflation rate, which may temporarily raise short term interest rates above the long term rates.

Measures of interest rates for different types of loans are provided variously on a daily, weekly, or monthly basis by the Federal Reserve Board, Federal Reserve Bank of New York, Federal Housing Finance Board, Moody's' Investors Service, Standard & Poor's Corporation, and American Banker Bond Buyer. They are published in press releases the Federal Reserve Bulletin, Moody's Bond Survey, Standard & Poor's Current Statistics and the American Banker Bond Survey, Standard & Poor's Current Statistics and the American Banker Bond Buyer Bond Buyer Index. Secondary sources include Economic Indicators and the Survey of Current Business.

The ten interest rate measures covered show the different costs of borrowing for short-term, medium term, and long term loans of high quality. Loans of high quality have the least risk of nonpayment. While all of these ten types are high quality loans, some are more secure than others. For example, the U.S. Treasury securities are default free and thus are the highest quality. Loan periods may be broadly defined as up to one year, one to three years, and more than three years. Some interest rates are for new loans, while others are for outstanding loans that are traded in securities markets. The loans are made to federal, state, and local governments, households, nonbank industries, and commercial banks.

The ten interest rates are listed below:

  1. U.S. Treasury Three Month Bills
    2. U.S. Treasury Notes and Bonds with Average Constant Maturities of Three and Ten Years
    3. High Grade Municipal Bonds
    4. Bond Buyer Index for Municipal Bonds
    5. Corporate AAA Bonds
    6. Prime Commercial Paper
    7. Federal Funds
    8. Federal Reserve Discount Rate
    9. Prime Rate Charged by Commercial Banks
    10. New Home Mortgage Yields

Interest rates have a significant impact on borrowing and spending. Generally, household, business, and government borrowings are stimulated when interest rates are perceived as high. The low and high designations are based on borrowers' assessments of past levels and prospective movements. If interest rates are expected to rise, there is an incentive to borrow immediately, but if interest rates are expected to fall, there is an incentive to delay borrowing. Interest rates react to and influence movements of the gross domestic product, money supply, inflation, and value of the dollar. The Federal Reserve focuses on interest rates as the ultimate tool in conducting monetary policy to foster economic growth and inflation.

Mike Moffatt, "What are Interest Rates?"
"Interest Rate." Wikipedia.