The rate is changed by the Federal Reserve as a tool to influence the demand for money and, in turn, economic growth. Prior to this past week's rate drop, the Fed Funds Rate was 6.5 per cent, where it sat for several months after the rate hikes of 1999. The last time we had seen it that high was in early 1991, when the Federal Reserve began dropping rates to bring the economy out of a deep recession. This key interest rate was actually in the double digit range in 1989, before dropping below 7 per cent back then. Rates continued to fall steadily to below 3 per cent in 1993.
Investors often forget the basic relationship between bond prices and interest rate changes.
Wherever interest rates go, bond prices go in the opposite direction. There is actually some logic to this. Generally speaking, interest rate changes have this impact on all fixed income investments. The impact of interest rate changes on corporate profits might be more logical to most. Companies typically carry some debt to finance expansion projects or for refinancing purposes.