Talk:Federal funds rate/Archive 1

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Archive 1

MoneyCafe.com

The MoneyCafe.com site does not appear to be very up to date. At the time of writing, it does not list the 11 May 2006 Federal Reserve move to 5.00%. — Preceding unsigned comment added by 204.253.249.81 (talk) 18:32, 25 May 2006 (UTC)

Discount rate

This article has (really, had) a link, "discount rate", which points to an unrelated economics concept. Can anyone provide info on the Federal Reserve's discount rate, either here or in a dedicated article? 68.122.4.16 02:41, 16 July 2007 (UTC)

Class gap

I was wondering if rising interest rates effect that increase in the gap between wealthy and middle class. For example people who currently have a lot of cash could be very happy with interest rates rising. They can make more money on guaranteed investments. Whereas blocking access to the funds might make it harder for people who do not have money to access it. — Preceding unsigned comment added by Compavalanche (talk • contribs) 18:28, 12 October 2006 (UTC)

You might want to try answers.yahoo.com, this isn't a forum for such questions, unless your question pertains to modifying or contributing to the article itself. Phaldo 20:10, 12 October 2006 (UTC)
Yet asking questions reveals flaws and gaps in our articles. Don't discourage people from asking questions, it helps us improve our articles and make them more understandable to those without knowledge of the subject! ~MDD4696 16:04, 17 August 2007 (UTC)

Fed Funds rate

it should be updated from dec 2006, i tried to put in a link to a picture, but it did not work ---i guess i dont know how to use wiki-pedia. this is a simple fix, who wnats to do it! http://research.stlouisfed.org/fred2/fredgraphfile/?height=600&width=1000&bgcolor=%23B3CDE7&txtcolor=%23000000&recession_bars=On&s[1][id]=FEDFUNDS&s[1][transformation]=lin&s[1][scale]=Left&s[1][line_color]=%230000FF&s[1][range]=Max&s[1][cosd]=1954-07-01&s[1][coed]=2007-12-01 —Preceding unsigned comment added by 206.223.235.88 (talk) 13:15, 29 January 2008 (UTC)

Relationship to overnight index swap

What is the relationship between the the Fed funds rate and the overnight index swap? Finnancier (talk) 11:52, 15 December 2007 (UTC)

Sorry for having overlooked this till now. Well, OIS is and IRS with the floating end pegged on something like the Fed Rate or LIBOR, mostly one of these two. Does that answer your question? Nshuks7 (talk) 06:18, 2 February 2008 (UTC)
Thanks! I thought OIS were only pegged to the Fed funds rate. So that means you could receive LIBOR OIS and pay FFR OIS, in an overnight basis swap? Finnancier (talk) 07:19, 2 February 2008 (UTC)
Looks like you would swap 3-month LIBOR for OIS pegged to FFR+spread. [1] Finnancier (talk) 07:23, 2 February 2008 (UTC)

Inflation

This article should either explain or provide solid links to other articles that explain the effect of the federal funds rate on inflation, and how the two affect each-other. — Preceding unsigned comment added by Iluxan (talk • contribs) 16:13, 6 August 2007 (UTC)

We should probably also expand the how and why the loosening and tightening of the money supply results in the change in the effective federal funds rate. Iluxan 14:41, 10 August 2007 (UTC)
I would suggest finding a copy of The Alpha Strategy by John Pugsley. It has an excellent discussion of price-inflation based appropriation of wealth by the federal government due to the way US cash supply is managed. No conspiracy theories or racism, just the realities of playing in a zero sum game where one party has control over cash, wealth, food supply and energy. People would be well served to understand the real possibilities of increasingly higher inflation and this book is good for that purpose.MicrocreditSA (talk) 12:23, 17 February 2008 (UTC)

Confusion / Contradiction about whether the Fed can set the fund rate

I refer to the following two sentences:

Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.

The federal funds rate is decided at Federal Open Market Committee (FOMC) meetings.

So can the Fed set the federal funds rate or not? Kindly clarify, as the two sentences creates confusion as it seems contradictory to the layman.210.176.70.2 06:49, 19 September 2007 (UTC)

I was going to say the same exact thing...I was under the impression (as it is also stated in the article) that the Fed can only change the discount rate. 128.61.37.103 01:54, 27 September 2007 (UTC)
The fed can only directly change the discount window. However, this will in turn cause a proportional shift in the fed funds rate. The fed funds rate is determined by the market (of the member banks). In reality the fed funds rate is very very close to the discount window and will adjust to any change in the discount window rate. —Preceding unsigned comment added by 152.17.53.96 (talk) 19:46, 27 September 2007 (UTC)
You are right that the fed (the FOMC) can only directly change the discount rate, but the fed does not typically change this rate to effect the fed funds rate. Instead the Fed has the Treasury increase or decrease the money supply in such a way to target a particular federal funds rate.
When the fed "raises interests rates" they have the Treasury sell bonds (getting money from the market in exchange for bond certificates). This decreases the money supply which is intended to cause the fed funds rate to increase.
When the fed "lowers interests rates" they have the Treasury buy bonds (giving money to the market in exchange for bond certificates). This increases the money supply which is intended to cause the fed funds rate to lower.
The fed has an indirect control on the fed funds rate. This is why sometimes they refer it as a "targeted" interest rate. Understanding the laws of supply and demand help to better understand how the fed controls the federal funds rate (a.k.a "interest rates"). I hope this helps.(207.172.218.46 (talk) 20:14, 9 December 2007 (UTC))
As yet-another-clarification, it is the trading desk at the New York Fed that buys and sells bonds (or "conducts open market operations"), and not the Treasury. I think the Treasury sells bonds as much as it has to in order to finance the Federal gov't, which is pretty independent of monetary policy. The Fed is in charge of buying bonds from banks to (indirectly) increase the money supply, or sell bonds to banks to (indirectly) decrease the money supply. -FrankTobia (talk) 16:21, 7 January 2008 (UTC)
FOMC has total control over the target 30 Day FF rate. They set it whenever they meet and may change it whenever they please. They have less control over the actual rate at which banks borrow money via the FedFund system during the day, but FOMC still can release cash during the day so there is some control there. The difference between the two rates is the slippage. The important slippage that all of the FF Options traders pay attention to is going to be the slippage at the end of the month. Then everything is settled and your slippage position value is calculated against what you paid for the slippage or how much you received to sell it. It is glorified insurance sales, imo. MicrocreditSA (talk) 12:24, 17 February 2008 (UTC)

Comparison with LIBOR

I removed the following point from the section comparing the fed funds rate with LIBOR.

  • The Federal funds rate is a mandatory floor rate which must be adhered to.

I don't understand what it means. The fed funds rate is a target the FOMC sets, not a "mandatory floor which must be adhered to." I guess that makes more sense if you're at the trading desk at the NY Fed, but I don't want to speculate. Could I get some clarification? Also it would be great if someone could come up with a source for that new section. I'll try to look if too much time passes without a response. -FrankTobia (talk) 16:16, 7 January 2008 (UTC)

That would be my mistake. But the rest is good =) as for citations, the one that I have given says it all, in not as many words. If you want a more detailed citation, I can do that as well. I added these two sections because Finnancier wanted a relation between the rates and because laymen want to know why all the fuss about interest rates... what effect do they have on the economy in general. Please correct me if I am amiss. Nshuks7 (talk) 08:35, 8 January 2008 (UTC)
Do you mean this one? I couldn't find anything about LIBOR on that page. I think I'm going to look around and see if I can find anything to flesh out the LIBOR section; if you can provide a more detailed citation that would be great. And I think you've done a great job with the two new sections. I'm a bit shaky on LIBOR myself, so this is a good chance for me to read up :-). -FrankTobia (talk) 04:00, 10 January 2008 (UTC)
That was for the reference on what the Fed Rate can do. About LIBOR, the best place to start is, well, LIBOR =) Also, for the Fed Rate, a good resource is the paperMarket Operations in the 1990s though I have not checked how "operations in 1990s" compare with current practices. Nshuks7 (talk) 06:55, 10 January 2008 (UTC)
Regarding the FF rate. It is important not to overcomplicate FOMC action. FOMC simply disburses cash into the system in order to keep the actual FF rate as close to the target rate as possible. There are certain days during the month when reserve periods begin and end, and on those days the fed sometimes does not control the actual rate as tightly it would like. The difference between the target rate and actual rate of 30 day FedFunds is known as slippage in industry parlance.
The slippage comes into play when trading FedFund Options, mainly. You guys should check into the Credit Default Swap market. There is a new future starting to be traded next month at the CBOT and it is basically the Junk Bond 50 index. This time next year everyone will be talking about Credit Default Swaps, I can almost guarantee it.
The reason FOMC had to drop the rate so severely last month was because they very nearly had a systemic banking crisis due to the liquidity problems caused by the SocGen tilt-out. I believe FOMC can not really go below 1% with the 30 day rate without some serious problems with a depreciating dollar. The tax rebate they are planning is like a drop in the bucket compared to what they hand out to these banks in the last 15 minutes before the cash market closes. They make it seem very complicated but in reality it is just very boring. The swaps are a little more interesting. MicrocreditSA (talk) 12:25, 17 February 2008 (UTC)

Encyclopedia article, not market ticker

Centrx removed the latest Fed funds rate because this is an encyclopedia article, not a market ticker. But many of the pages on central banks report the bank's target rate. (I hope those pages are updated frequently.) Is there a Wikipedia policy on this? Finnancier (talk) 12:54, 4 February 2008 (UTC)

I don't know about wikipedia policies, but since the FFR is always of macroeconomic interest, globally at that, we can add a history section on when the FFR was instituted, how it has affected or reflected global/local markets and so on. Nshuks7 (talk) 08:29, 5 February 2008 (UTC)
It is one thing to put "The current Fed Funds target rate is X, set on Y" somewhere below in the article--though that's not really necessary or especially important since that information is already in the linked article History of Federal Open Market Committee actions--but the removed text was framed as though the change itself, "the most recent change", was some element of top-level importance such that it belonged in the introduction, and that every change would be reflected there with the date and the amount of change. —Centrx→talk • 19:29, 6 February 2008 (UTC)
Point taken. I didn't realize there was a separate article documenting the FOMC's actions. Finnancier (talk) 03:07, 7 February 2008 (UTC)
Don't think about the specific FF rate, it is not as important as watching the manner in which FOMC hands out cash and what is going on in the rest of the market relative to the strength or weakness of the money supply. The important thing is whether they are in an easing cycle or a tightening cycle, and its pretty obvious they intend to keep 'easing' all the buying power out of 401(k) accounts nice and slowly, by gradually increasing the money supply, which in turn devalues the currency, which then hurts stock prices, which then makes them justify giving banks more cash to service their untenable debt, devaluing the currency again, over and over again.
I highly suggest reading The Alpha Strategy by John Pugsley, written back in 1980. Great book. MicrocreditSA (talk) 12:25, 17 February 2008 (UTC)

The Fed can or the Fed can't, but why?

The article says:

The actual Fed funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.

and

[W]hile the Fed cannot set an exact federal funds rate, it can set a specific discount rate.

These bare facts are just confusing. The article could use some how and why to explain why the Fed can't set the Federal funds rate.  Randall Bart   Talk  19:42, 29 October 2008 (UTC)

What's a Tier 1 rate?

"Tier 1 capital ratio of 10.4%. That is well above the 6% level, where regulators begin to get nervous."[2]
~ender 2008-11-14 1:48:AM MST — Preceding unsigned comment added by 4.240.12.149 (talk) 07:48, 14 November 2008 (UTC)

Overnight rate

You can get current and historical Fed Funds data from http://www.federalreserve.gov/releases/H15/data.htm . I've used this data myself to create a graph of daily fed funds rates since the 1950s at http://interest.rates.cx . I don't want to add links myself as it's probably a conflict of interest, but if people feel it would be of use for the article then do go ahead. —Preceding unsigned comment added by 91.84.13.71 (talk) 13:32, 1 February 2009 (UTC)

Merge proposal

A merger of Fed Funds Probability into this article is proposed. That article seemingly has relevant information but is insufficient to be a standalone article. John M Baker (talk) 21:26, 24 February 2009 (UTC)

I disagree. The Federal Funds Rate is of primary importance for understanding financial markets. The Federal Funds Probability, while still important, is not something foundational. Put another way, in any respectable Money and Banking class you might take, you would learn of the Federal Funds Rate. It is extremely unlikely that you would ever discuss the Federal Funds Probability in any class. Therefore, these should be kept as separate articles. —Preceding unsigned comment added by 152.2.124.228 (talk) 20:19, 22 April 2009 (UTC)

Required reserves ARE interest-bearing

"U.S. banks and thrift institutions are obligated by law to maintain certain levels of reserves, either as non-interest-bearing reserves with the Fed or as vault cash."

Not true. As of some time, the required {and excess} reserces ARE interest-bearing. The interest is set as a discount of the FF rate. Source: http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm — Preceding unsigned comment added by 77.253.167.1 (talk) 12:48, 8 November 2008 (UTC)

Yes, since October or September of last year. MMMMM742 (talk) 08:15, 23 September 2009 (UTC)

"Conspiracy Theory"

Most people who KNOW economics know that this article is complete and utter bullshit straight from the fed's mouth. The vast majority of banks only have 10% of what they loan out, and there are NOT other banks covering that 90% gap. What IS happening, is the federal reserve, which has the power to PRINT MONEY, is digitally inflating our currency, handing out the money to banks to loan to us to buy houses, then charging us the federal interest rate of say, 5.75% right now, and the banks tack on their own 1-2% and everybody wins, the fed gets to levy essentially a tremendous property tax on the american people, and the banks get interest off money they never had. I'm not saying parts of it are true, certainly, but positing it as if the banks have this "surplus" to give is a lie. The federal reserve does more than just "monitor", it plays an active role in printing then loaning out money to perpetuate this 10x whatever-they-have loaning rate. --76.185.162.176 19:39, 17 August 2007 (UTC)

This isn't crap. Instead its called leveraging...or officially "fractional reserve banking". See [www.truthsetsusfree.com/ModernMoneyMechanics.pdf].Smallman12q (talk) 00:04, 11 February 2009 (UTC)
You (OP) are an idiot, and you need to stop listening to Ron Paul. You are correct that banks lend out all but 10% of their money -- That's what they are supposed to do. And any that have a surplus or deficit would keep it small, around 1%, since they have to cover that or lend it out at a low interest rate. This is what the article says. Enjoy your Kool-Aid 74.177.8.166 (talk) 00:49, 31 July 2009 (UTC)
At the time 76.185.162.176 was writing this, there were no direct loans from the Federal Reserve as far as I know (the special programs started in 2008). Effectively all the new money was lent to the government (by purchasing Treasury bond, notes and bills). As for the banks holding only 10% of the deposit money, that is actually the usual business model of a bank - borrowing short term and lending long term. That's why bank runs bankrupt banks (but since the 1930s I think depositors are insured by the FDIC, i.e. the federal government). MMMMM742 (talk) 08:26, 23 September 2009 (UTC)

Same for all banks?

I was wondering whether the rate could really be the same for all banks. The default probabilities of different banks are different, so the interest rates would be different as well? Why is there one effective federal funds rate? MMMMM742 (talk) 08:18, 23 September 2009 (UTC)

The rate is a target rate. The actual loans are individually negotiated, and their interest rates often vary from the target rate. John M Baker (talk) 13:30, 23 September 2009 (UTC)
Only now I see that the answer is already in the article - the effective rate is the weighted average of all transactions. MMMMM742 (talk) 10:54, 24 September 2009 (UTC)

Any explanation as to why the effective rate is so low, as of 2008-11-14

The effective funds rate, the rate at which banks borrow this money off each other, should be much higher I think. Assuming that Lehmans had borrowed some of these funds from another bank at the moment they went bankrupt, will the lending bank get their funds back? If so, I can understand why the effective rate could get quite low. If however, the lender of these fed funds has to join the queue with all the other creditors, then surely this rate should be higher. Can anyone clarify this? I also get the impression that borrowing banks one cannot overborrow and use this as a massive source of cheap funds? Aaron McDaid (talk - contribs) 23:47, 14 November 2008 (UTC)

The effective federal funds rate is actually the weighted average of the different rates between banks. A bank that is perceived as overleveraged will surely borrow at a higher interest rate. If the banks would just get their money back by the Fed if there would be a default, then I think the Fed would never have been able to raise rates and there would have been hyperinflation a long time ago, as this risk-free lending will drive interest rates close to 0. MMMMM742 (talk) 11:00, 24 September 2009 (UTC)

Market obeying the Fed

How does the announcement of a rate change alone affect the (effective) federal funds rate? I would expect that holders of e. g. Treasury bills generally don't sell them at the previous low prices anymore if the Fed just announced lowering the rate. Then banks may be inclined to lend at lower rates because they get lower yields from Treasury bills. MMMMM742 (talk) 14:16, 8 December 2009 (UTC)

Non existing link

The link of footnote 8 (http://news.yahoo.com/s/ap/20081216/ap_on_bi_st_ma_re/wall_street) is wrong. —Preceding unsigned comment added by 212.41.207.201 (talk) 09:08, 19 February 2010 (UTC)

A better link has been inserted. John M Baker (talk) 15:20, 19 February 2010 (UTC)

The Fed does not cut interest rates because the stock market drops

"This followed the unusually large 75 basis point cut made during a special January 22, 2008 meeting in response to the stock market turmoil that January,[6]" etc. etc.

I think the Fed would be very unhappy with this statement. The Fed cares about the real economy (output and inflation), not about stock markets. —Preceding unsigned comment added by 193.146.129.166 (talk) 15:34, 11 April 2008 (UTC)

Whether or not the Fed is "happy" with the article or statements in it is irrelevant. The Fed has responded to stock market fluctuations as a historical fact, whether they want to be perceived that way or not is also irrelevant. Squ1rr3l (talk) 18:01, 21 September 2010 (UTC)
I have deleted the "because the stock market drops" language, because it was not supported by the cited source. I would have no objection to its reinsertion with proper sourcing. John M Baker (talk) 20:38, 21 September 2010 (UTC)

How the Fed influences the Fed Fund Rates

The article still does not clearly specify what are nominal rates and how the Fed actually influences the Fed Funds Rate (which is does by buying/selling Government Securities to financial instituions). Rajrishi1985 (talk) 10:07, 3 March 2009 (UTC)

I think it does - the nominal rate is simply a rate the Fed is targeting, and by buying and selling of securities they change the amount of money in the banks and thus their willingness to lend or borrow. MMMMM742 (talk) 08:09, 23 September 2009 (UTC)
The article does not explain the relationship between the Federal Funds Rate becomes the Effective Federal Funds Rate, and the process and activities between the entities, ie. Federal Reserve and Banks in establishing this mechanism of monetary policy —Preceding unsigned comment added by 117.120.18.132 (talk) 01:59, 7 January 2011 (UTC)

This page needs revision

The content of this page is too hard to understand for many viewers and should be considered for simplification. — Preceding unsigned comment added by 64.58.165.60 (talk) 18:39, 18 August 2007 (UTC)

Yes, generally, I think articles on Wikipedia on macroeconomic subjects are confusing and hard to understand. Not good for someone who needs definitions and introduction. This article is poor IMHO. Why a bulleted list in the beginning of the Mechanisms section? Relrel 12:35, 19 September 2007 (UTC)
Thirded. 128.114.164.102 (talk) 01:12, 19 March 2013 (UTC)

Zero Funds Rate?

What would happen if the Funds Rate ever hit zero? zbvhs (talk) 00:31, 31 January 2008 (UTC)

It would *imply* that the US government wants banks to lend to each other at zero interest rate! I don't think that'll ever be, since banks are always going to want to lend to each other at some profitable rate. If the Fed *really* wanted that to happen it would drop its discount window to zero as well, which will send banks scurrying to the discount window and banks will be able to borrow at zero interest, at which point I will open an investment bank and fund a personal real estate empire from one corner of the Earth to the other, especially rain forests and aboriginal settlements. And, my friend, I suggest you do the same. Nshuks7 (talk) 06:14, 2 February 2008 (UTC)
You would get some massive superinflation, if the money supply expanded to that extent a gallon of milk would cost like $40 or something. It would be very bad. When Bill Gross gets on TV and says that he can't sleep at night, its because he gets freaked out about weimar-germany type of inflation in consumptive goods. I think even they aren't so greedy to go below 1%. One would hope. MicrocreditSA (talk) 12:25, 17 February 2008 (UTC)
This discussion is utter nonsense - totally inaccurate and misleading. It should be deleted in its entirety and the entire explanation of the Federal Funds Rate and the "Target Rate" should be rewritten by a trained macroeconomist. Federal Funds borrowing is done for 24 hours primarily so that banks can meet their Federal Reserve reserve requirements. No lender borrows money for 24 hours and uses it to affect the economy by loaning it out for months and years. The source of the misunderstanding and the use of the "target rate" by the Fed is that the Fed and its staff naively confuse the significant "bank rate" of the UK of 80 years ago that Keynes wrote about with the Fed's insignificant "target rate." They are absolutely totally different. The "bank rate" can affect the UK real economy; the "target rate" cannot affect the US real economy. See "The General Theories of Inflation, Unemployment, and Government Deficits. 38.124.32.102 (talk) 16:43, 29 May 2014 (UTC)

Intro/Lede

Removed ---At this rate, growth rate of real GDP is stable in relation to Long Run Aggregate Supply at the expected inflation rate.[dubious – discuss][citation needed] --- makes zero sense. If wish to expand and or explain further, the above is the original text. 10stone5 (talk) 03:21, 18 September 2014 (UTC)

Comparison between discount and federal funds rates

I think the bold text in this statement may be false, and requires a citation at the very least:

"These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate"

From this image, it looks like the opposite is true (except since 2002): http://www.frbsf.org/education/files/drecon_0409a.gif

Master latch (talk) 15:38, 15 September 2015 (UTC)

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