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CHAPTER 4

The Level and Structure of Interest Rates

Introduction

Over the past three decades interest rates have often followed patterns of persistent increases or persistent decreases with fluctuations around those trends. This is illustrated in Exhibits 4.1 and 4.2 where 10-year Treasury rates and AAA and Baa corporate bond yields are shown from 1970 to 2012. As shown, in the late 1970s and early 1980s, interest rates increased dramatically, increasing from 7.38 percent in February 1977 to 15.75 percent in November 1981. This period was marked by high inflation and recession (stagflation) and by the implementation of a contractionary U.S. monetary policy in which the Federal Reserve pushed the rate up. This period of increasing rates was followed ...