Quoted: How does the short term rate get higher than the long term rate?
The Fed sets a rate at which banks can get money. So they set the long term rate, right?
What pressures would push the short term rate higher?
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We are talking about 2 different things here.
The yield curve refers to the Treasury Bond Market. IE 6mos t-bill, 2 yr note, 5yr note, 10yr note, etc.
The bond market pretty much dictates those
yields (notice I did not say
rates). When the market feel that the rates have gotten high enough, they start to buy on the longer end of the curve(10yr/30yr bonds) to lock in the higher
rates. That make the long term yield of those bonds drop. Since there are no buyers, and more than likely more sellers on the shorter end of the curve, those yields go up. Hence an inverterted yield curve. This has severe ramifications to borrowing cost. That is a lesson best taught in a econ class. Too long to go into here.
The FOMC raises or lowers the Fed Funds rate. The rate in which banks borrow money. This in turn raises or lowers borrowing rate of consumers. Thereby regulating money supply.
Rate = Fixed interest paid on a particular bond
Yield = Overall earned money on a bond less premuim paid or discount earned.
There is an inverse relation between a price of a bond and its yield.