ABSTRACT
On January 31, 1996, the Federal Open Market Committee voted to ease monetary policy, which was widely reported as a lowering of interest rates. Monetary policy actions can affect both the supply of and the demand for financial assets, and their effects depend not only on current actions but also on the public’s expectations of future policy moves. Financial market participants who are interested in the future course of inflation watch Federal Reserve actions closely. If Fed is viewed as likely to pursue a policy that will prevent significant inflation over time, market yields will be lower. On the other hand, if public doubts that the Fed is committed to low inflation, then financial markets will reflect fears of future inflation by incorporating an inflation premium in interest rates. The market is used both by financial institutions to hedge their federal funds market positions against changes in funds rate and by speculators attempting to predict Federal Reserve monetary policy.
