Unformatted text preview: al Funds rate target. The “10-year term premium” is the amount by
which the yield on a 10-year bond exceeds the expected average level of short-term interest rates over
the term to maturity of the bond. The “Baa–Treasury spread” is the spread between Baa-rated corporate
bonds and 10-year Treasuries. The “LIBOR–OIS spread” is the spread between the three-month U.S.
dollar London Interbank Offer Rate (LIBOR) and the overnight interest-rate rate swap (OIS) rate. (LIBOR)13 and the overnight interest-rate rate swap (OIS) rate, which can be viewed
as essentially a market forecast of the average level of the federal funds rate over that
three-month period. The sharp increases in this spread during the crisis indicate
that the short-term borrowing costs of many banks (especially late in 2008) were
considerably higher than would be indicated by the federal funds rate.
It is popular to attribute the credit boom (at least in part) to the Federal Reserve
having kept the federal funds rate “too low for too long,” but comparison of the
path of the funds rate in Figure...
View Full Document