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

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 inter- play 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