Interest rates change in response to a variety of economic events, such as changes in Fed policy, crises in domestic and international financial markets, and changes in the prospects for long-term economic growth and inflation. However, economic events such as these tend to be irregular. There is a more regular variability of interest rates associated with the business cycle, the expansion and contractions that the economy experiences over time. For example, short-term interest rates rise in expansions and fall in recessions. Long-term interest rates do not appear to co-vary much with the level of economic output.

This article appeared in the January/February 1996 edition of Business Review.

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