The Simple Math: How a Mere Quarter-Percent Interest Rate Hike Can Produce Big Swings on Bond Prices and Foreign Exchange Rates

© 2015 Prof. Farok J. Contractor, Rutgers University

Bah! Humbug! What can a mere quarter-percent hike in the Federal Reserve Bank’s interest rate do to markets? It seems so small a change as to be trivial. For two years prior to Janet Yellen’s appointment as Chair in January 2014, her predecessor, Ben Bernanke, and the business press speculated on the timing of a rate hike with casuistic verbal contortions that kept the markets guessing. Finally, the agony was over on December 16, 2015. After almost a decade, the Fed raised short-term interest rates by . . . a mere one-quarter percent. But what was the agony all about? The millions of words in the media, the roiling of markets worldwide? … CONTINUED ON ARCHIVE

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