Flactuations in Us Interest Rates

US Interest Rates

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Abstract

Interest rates are one of the tools that Central Banks use to regulate economic activities within an economy. In the US, the FED is solely charged with the duty of determining some rates of interest in the country. If FED rises of reduces the rate of interest, bank consequently raise or lower the interest that they charge borrowers. Over the years, the rates of interest I the US has been fluctuating constantly due to several factors. The interest rates in the late 1970s and early 1980s were a bit higher that had been predicted compared to previous peaks. During this time, the interest rate averaged 6.22% and was highest ion 1980 at 20%. However, the rate has been going down over the years, reaching a low of 0.25% in 2011. Currently, the rate is at 3.25%. The future rates of interest in the US might not be easily predictable due the changing economic activities in the world. However, going by the current situations it is highly likely that the rates of interest will go down significantly.

Interest fluctuations over the years

The interest rate term structure refers to the relation between the interest rate and the time of maturity of a debt for a given borrower in a particular currency (Rudebusch & Wu, 2008). In the American economy, treasury securities for various maturities are closely examined by the traders and are plotted on graphs. An interest rate describes the rate at which interest is paid by borrowers for the use of money that has been borrowed from a lender. In particular, the interest rate is usually a percentage of the principal amount of money borrowed, which is paid within a given period.

One of the most important tools used in monetary policies, taken into account when dealing with variables such as investment, inflation, and unemployment is the interest rate targets. The central bank of the United States is responsible of controlling the interest rates in the country, for instance the bank can reduce interest rates when the nation wishes to increase investment and the country's consumption (Gasha et al., 2010). Nevertheless, in controlling the present interest rates there are steps, which should be taken by the central bank that could affect the economy adversely. This may include lowering of the interest rate, as a macro-economic policy can be dangerous result in economic bubble, whereby large sums of investments are directed into the real-estate market and stock market.

Before the establishment of the Federal Reserve System, the short-term interest rates ordinarily exceeded the long-term interest rates in this period. In addition, no theoretical analysis or historically observed patterns of interest rate behavior can really account for this occurrence. Historically, apart from the risk aversion, the expectations suggest both increasing and decreasing yield curves, which have equal probability. Observation from the past interest rates in the United States associate the rising yield curves with low interest rate levels and descending curves with high interest rate levels. Records indicate that the United States interest rate levels once fell drastically in the 1890's but then started rising slowly in 1914. Due to unavailability of trustworthy data, estimates were formulated for the years 1884 through to 1899 whereby the first quarter average yields were calculated from the prevailing market prices of high grade bonds and yield curves that were generated by least squares estimation (Medeiros & Waldo, 2011).

It is important to note that the early interest rates quoted here were unpredictable money market rates of interest because a fluctuating money economy existed in those ancient times (Gasha et al., 2010). In such kind of an economy, daily bargaining among merchants and traders for credit at a price existed. In addition, up to recently the American interest rates fluctuated very