Interest Rates
The cost a borrower pays for using someone else's money
what is an interest rate?
This is the short-term rate targeted by the Federal Reserve.
What is the federal funds rate?
This happens to the purchasing power of money when inflation rises.
What is a decrease?
The possibility that a borrower will fail to make promised payments.
What is default risk?
the Acronym TIPS stands for
What is Treasury Inflation-Protected Securities?
The compensation a lender receives for allowing someone else to use their money.
What is Interest?
When the Fed lowers its policy rate, borrowing costs generally become this.
What is lower / less expensive?
The stated interest rate on a loan or bond is called this.
What is the nominal interest rate?
The difference between the yield on a risky bond and the yield on a comparable Treasury.
What is a credit spread?
This is the unemployment rate associated with stable inflation.
What is NAIRU?
These two groups are on opposite sides of a loan: one provides the money and the other receives it.
who are Lenders and Borrowers?
The Fed directly influences this type of interest rate more than long-term rates.
What are short-term interest rates?
This interest rate adjusts the return for inflation.
What is the real interest rate?
This generally happens to risk premiums during a recession.
What is an increase?
This measures the difference between actual GDP and potential GDP.
What is Output Gap?
A loan with a longer maturity may have a different rate because investors must consider conditions and risks over this period of time.
What is the time to maturity?
The Fed cuts its policy rate, but a company's loan rate doesn't fall by the same amount. Credit risk and this other factor can explain why.
What are risk premiums?
These Treasury securities are designed to protect investors from inflation.
What are TIPS?
Investors demand larger risk premiums during recessions because they become more concerned about this.
What are defaults and business failures?
When unemployment falls below NAIRU, this tends to increase because the labor market becomes tighter
What is inflation pressure?
A corporation generally pays more to borrow than the U.S. Treasury because investors perceive more of this.
What is default risk?
This is why a Fed rate cut does not automatically cause every interest rate in the economy to fall immediately.
What is the fact that different rates reflect different risks, maturities, and market conditions?
This market-based measure is calculated from the difference between comparable conventional Treasury and TIPS yields.
What is breakeven inflation?
During this event, credit markets can become severely disrupted, making it difficult for businesses to obtain financing even when the Fed cuts rates.
What is a financial crisis?
During 2008, this market-based measure of expected inflation collapsed as investors became concerned about severe economic weakness and possible deflation.
What is breakeven inflation?