Macroeconomic Factors that Influence Interest Rate Levels Macroeconemic factors have an important effect on both the general level of interest rates and the shape of the yield curve. These primary factors ane: Federal Reserve polcy, the federal budget deat or suplus, International factors like the foreign trade balance and interest rates abroad, and the level of business activity The Federal Reserve Board controls the money supply. To stimulate the economy, the FedB the money supply. The initiel effect would be to cause short-term rates to decline; howeve supply mi B money lead to an increase in expected future innation, which wouldanse iong-term es to rise even as short-term rates fel The reverse is true when te B the money-ply. y- r the government spends more than it takes in as taxes, it runs aeect B. which must be covered by addtional berrowing or by printing money. If the govermment borrows money, thisS B the demand for funds and sm Binterest rates. tf tre emment pri ts money, the result wil be . BiMaten, which wa w t So, the laper-fedral, et B.ather thre constant, the St the level of interest rates If U.S. businesses and individuals buy more goods from abroad than they sell (more imports than exports), the U.S. is nunning a foreign trade B.which must be financed. This generally means that the U.S borrows from nations with exportlect. The larger the trade es B.the higher the tendency to borrow, so U.S. interest rates become highly dependent on interest rate levels abroad. Consequently, s interdependency B the Fed's ability to use monetary policy to control U.S. economic activity Business conditions influence interest rates. Duringa B the demand for money and the infation rate tend to fall and the Fed tends tolest B the money supply to sbimulate the economy. Asa nesuit there is a tendency for interest rates to decline duringSect.During short-term rabes decine more sharply than lang-term rates because (1) the Red operates manly in the sm cio the Fed's intervention hass the strongest effect there; (2) Long-berm rates refiect the average expected inflation rate over the next 20 to 30 years and this expectation doesn't change much due to the level of current efation. So, short-term rates are Sees B volatile than long-term rates. 6 9 3 4 W E