(Image Source: Joshua Woroniecki / Unsplash)
September 2022
We sometimes think of the Federal Reserve discount rates as immediately affecting the rates charged to consumers for loans of all types, ranging from car loans to 30-year mortgages. The discount rate is the interest rate the Federal Reserve and other banks charge to depository institutions when lending money overnight, typically to meet their federally mandated reserves. Since the discount rate is a short-term loan rate, an increase in the rate might have quick effect on credit card rates or adjustable-rate mortgages with floating interest rates, but long-term mortgage rates are more directly affected by the 10-year treasury bond rate and other factors, such as supply and demand.
The Federal Reserve Bank of San Francisco explains, “Changes in the discount rate are made judgmentally rather than automatically and may somewhat lag changes in market rates. The immediate response of market interest rates to a change in the discount rate — the announcement effect — depends partly on the extent to which the change has been anticipated. If rates have adjusted in anticipation of a change in the discount rate, the actual event may have only moderate effects on market conditions.”
However, rising or receding interest rate tides do tend to lift or lower rates for all loans over time. Eras with higher interest rates have high rates across all loans, and eras with lower interest rates have lower rates across all loans. Despite the rise in rates, we are still in an era with relatively low costs for borrowing. For reference, the current discount rate is 2.50%, up from a historic low of 0.25% in March of 2020. The 1-year Treasury bond was 4.03% at print, and the 10-year Treasury bond was at 3.692%.
That brings us to today’s quiz, which focuses on 1981, when interest rates were at post-WWII historic highs. Mortgage rates hit a peak high of 18.45% for a brief time in 1981. 10-year treasury bonds hit 15.84% on September 30, 1981, and 1-year treasury bonds hit a yield of 16.87% on August 24, 1981.
The Federal Reserve discount rate also hit a high in 1981. How high did the discount rate go, and which month in 1981 marked that high?
A. 19.88% in January
B. 17.10% in April
C. 14.00% in June
D. 18.45% in August
E. 5.67% in December
ANSWERS
Answer C. The Federal Reserve discount rate hit a high of 14.00% in June of 1981.
