The Complexity of Interest Rates: Beyond the Fed’s Decisions
By Gene Balas, CFA®
Investment Strategist
Investors may see the current environment as a time to “lock in” a fixed income investment at current interest rates based on the belief that the Federal Reserve will soon lower interest rates. But it’s more complicated than that. When discussing interest rates, we must first define which interest rates we are referring to.
The Federal Reserve controls the very short-term rates that dictate the overnight interest rates for banks’ lending to each other. It is these short-term rates that are reflected in what investors receive in bank savings accounts and other short-term instruments, including some money market funds and certain other products. These rates are influenced by Fed decisions.
However, longer-term interest rates for securities with maturities from anywhere from a few months duration out to 30 years or so are determined by investors’ decisions to buy or sell bonds on the open market. These rates are not controlled by the Fed, but rather by supply and demand in the financial markets. more
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