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August/September 1980

Rise and Fall of Interest Rates

by Norman N. Bowsher

Market interest rates have moved over a wide range since mid-1979. In the last half of 1979 and in the first three months of 1980, interest rates rose to unprecedented levels. Rates on highest grade corporate bonds, for example, increased from 9.3 percent in June 1979 to 13 percent in March 1980. Over the same period, yields on 4-month prime commercial paper jumped from 9.7 percent to 16.8 percent, while the prime rate on business loans at large banks rose from 11.5 percent in mid-1979 to 20 percent in early April 1980. This article attempts to place the recent fluctuations in interest rate levels into perspective by discussing both the function of interest rates and the economic significance of their levels. In addition, it reviews recent developments that impinge on interest rates.