A Daily View of Yield Spreads and Short-Term Interest Rate Movements

Abstract

Daily data on short-term interest rates are used to show how changes in Federal Reserve operating procedures have affected the term structure. Yield spreads were helpful in predicting short-term interest-rate movements during the nonborrowed reserves targeting period (1979-82) but not during the earlier Federal-funds targeting period. Since the adoption of contemporaneous-reserves accounting in 1984, yield spreads have been informative about short-term interest rate movements, principally because of the interplay between the market determination of the overnight funds rate on reserve settlement Wednesdays and the Fed's apparent commitment to stabilizing the funds rate on other days. Copyright 1996 by Ohio State University Press.