Question

What are the term structure of interest rates and the yield curve? Can the Fed act to reduce long-term nominal interest rates after the fed funds rate reaches zero, How might it do this?

Answer 1

The term structure of interest rates refers to relationship between maturities and yields of bonds with same credit rating. Usually term structure refers to Treasury securities but in some cases it can also include riskier ones.

A graph showing the term structure of interest rates of securities is known as the yield curve. For example :

Usually, the yield curve in the US has been upward sloping. The yield curves are higher for longer maturity bonds because they are riskier than the shorter maturity bonds whose yields are lower.

Fed believes that slashing interest rates to negative values cannot help the economy out of the current financial crisis. Japan and others in the Euro area had long before pushed their short term interest rates to negative. Fed has stayed positive. Although President Trump has tweeted that Fed should now accept the fift of negative rates. Jerome Powell, Fed's Chairman believes that negative interest rates are not useful for America and theytwould not change the economic conditions immensely.

It was firstly during the global crisis that nations around the world reduced the rates this low. People around the world found it better to withdraw their money from the banks. However this policy did not help tota great extent.