In these circumstances, rising credit demand is almost always reflected in an increase in corporate borrowing costs and that has, indeed, been our recent experience, especially in longer-dated debt issues. Real interest rates on corporate bonds have risen more than a percentage point in the past couple of years. Home mortgage rates have risen comparably.
The Federal Reserve has responded in a similar manner, by gradually 1  BIS Review 31/2000  raising the federal funds rate over the past year. Certainly, to have done otherwise - to have held the federal funds rate at last year’s level even as credit demands and market interest rates rose - would have required an inappropriately inflationary expansion of liquidity.