Long Term Perspective

The yield on the 3-month Treasury bill is typically lower than the federal funds rate. In the 1980s, the 3- month bill averaged 49 basis points less than the funds rate, but in the 1990s this average fell to 18 basis points.

The spread between the 3-month Treasury bill and the federal funds rate averaged minus 13 basis points between 2000 and 2006. This means that the 3-month bill yield was typically 13 basis points lower than the federal funds rate.

Values shown reflect monthly averages.

Short Term Perspective

The gap between the 3-month bill and the fed funds target has turned slightly negative starting with April 2006 and continuing into 2007. The negative gap widened during 2007 as expectations rose for the Fed to cut rates and also on flight to quality during the second half of the year. Treasury rates fell over credit crunch concerns. In November, the average yield on 3-month bills fell a monthly 65 basis points to 3.35 percent while the effective fed funds rate slipped to 4.50 (monthly average) from 4.75 percent in October.