ECONOMIC

Chart 6Interest RatesPERCENT PER ANNUM141210- V' \\ FEDERAL FUNDS\ CORPORATE Aaa BONDS\HIGH-GRADE MUNICIPAL BONDS3-MONTH TREASURY BILLS(New issues)i i i i I i i i l I I i i i | i I i i i i i I | 1 | i i I i i i i i '1974 1975 1976SOURCES: DEPARTMENT OF THE TREASURY, BOARD OF GOVERNORS OF THE FEDERAL RESERVESYSTEM, MOODY'S INVESTORS SERVICE, AND STANDARD & POOR'S CORPORATION.At the end of 1976 both short-term and long-term interest rates werewell below the levels reached at the start of the recovery in early 1975.Declines in interest rates are not typical of an economic expansion. The 1976experience results in part from a decline in the expected rate of inflation,which has apparently accompanied the decline in actual inflation rates. Thedecline in longer-term interest rates, however, may have been smaller thanthe decline in the expected long-term rate of inflation. If so, the real rate ofinterest—one measure of the impact of monetary policy on the economy—has not decreased.OTHER FINANCIAL DEVELOPMENTSNonfinancial corporations have lengthened the average maturity of theirdebt during the recovery. With severe liquidity problems at the start of1975, brought on by unusually large short-term borrowing in previous years,most businesses aimed at restructuring their balance sheets by increasingtheir long-term borrowing relative to short-term borrowing and by holdingmore liquid assets such as Treasury bills. The U.S. Treasury's borrowingstrategy has shifted in a similar direction in 1976, with 89 percent of the increasein marketable interest-bearing public debt in the form of longermaturitycoupon issues, compared to 53 percent in 1975.