Finance - Robert Hamill

Interest Rates

I am always reading or hearing about interest rates, but I know very little about how to make them work for me in my portfolio. I recently read 'Maestro', the recent history of the Fed under Alan Greenspan by Bob Woodward. Here are some of the fundamental facts (current date April 23, 2002) that apply to interest rates.
Be careful when readding to note whether short, medium or long term rates are being discussed, because they have different characteristics and are affected differently by various policies. And they affect different parts of a portfolio.

Short-term rates

The Fed Funds rate, which banks must charge each other on overnight loans, is set by the Fed. It's the primary interest rate discussed when you hear the Fed raised or lowered the rates. These are typically the lowest interest rates available.
Short-term in economic terms means 1 year or less.
The business cycle underlies the predominant changes in this rate. The Fed changes this rate to try to calm inflationary forces and to maintain high levels of employment.
The current Fed Funds rate is 1.75%. One year ago it was 4.50%. (Sep. 21, 2002. 1.75%)
   * The entire change is under control of the Fed.
   * It is much lower than a year ago.
   * Your money market account is paying much less this year, but your principal has been preserved.