In the United States, the federal funds rate is the interest rate in which the depository institutions (banks and credit unions) lend the balance of reserves to other depositors overnight, on an uncollateralized basis. The reserve balance is the amount deposited in the Federal Reserve to maintain the depository reserve requirements. Institutions with surplus balances in their accounts lend balances to institutions that require larger balances. The level of federal funds is an important benchmark in financial markets.
The interest rate borrowed by the borrowing bank to the borrowing bank to borrow the negotiated funds between the two banks, and the weighted average of these levels in all such transactions is the effective level of federal funds .
The federal target funding rate is determined by a meeting of members of the Federal Open Market Committee that usually occurs eight times a year about seven weeks apart. The Committee may also hold additional meetings and apply target level changes beyond the normal schedule.
The Federal Reserve uses open market operations to influence the money supply in the US economy to create an effective federal funds rate following the federal funds target rate.
Video Federal funds rate
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Financial Institutions are required by law to maintain certain reserve levels, either as reserves with the Fed or as cash holdings. This reserve rate is determined by the extraordinary assets and liabilities of each depository, as well as by the Fed itself, but typically 10% of the total value of bank demand accounts (depending on the size of the bank). In the range of $ 9.3 million to $ 43.9 million, for transaction payments (checking accounts, NOW and other deposits that can be used to make payments), the reserve requirement in 2007-2008 is 3 percent of the final days of each day the average amount held over a two-week period. More than $ 43.9 million in transaction deposits held at the same storage agency carry 10% of mandatory reserves.
For example, assume a certain US depository, in normal business, issuing a loan. It handed out money and lowered the bank reserve ratio into borrowed money. If the reserve ratio falls below the legally required minimum, it must increase its reserves to keep compliance with Federal Reserve regulations. The Bank may borrow the necessary funds from another bank that has a surplus in its account with the Fed. The interest rate borrowed by the borrowing bank to the borrowing bank to borrow the negotiated funds between the two banks, and the weighted average of these levels in all such transactions is the effective federal funds rate .
The federal target fund level is governed by the Federal Reserve governors, which they enforce by open market operations and adjustments in the reserve rate. The target level is almost always what the media refers to the Federal Reserve "changing interest rates." The actual federal funds rate is generally within the target level range, as the Federal Reserve can not establish a fixed value through open market operations.
Another way banks can borrow funds to maintain the required reserves is by taking a loan from the Federal Reserve itself at a discount window. These loans should be audited by the Fed, and the discount rate is usually higher than the federal funds rate. The confusion between these two types of loans often causes confusion between the federal funds rate and the discount rate. Another difference is that while the Fed can not establish the appropriate federal funds rate, it sets specific discount rates.
The federal funds rate target is determined by the governor at the Federal Open Market Committee meeting (FOMC). FOMC members will increase, decrease, or leave interest rates unchanged depending on the meeting agenda and US economic conditions. It is possible to conclude the market expectations of the FOMC decision at the upcoming meeting of the Chicago Board of Trade (CBOT) Futures Contract Fed Funds, and this probability is widely reported in the financial media.
Maps Federal funds rate
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Interbank loans are basically a way for banks to raise money quickly. For example, banks may want to finance large industrial efforts but may not have time to wait for deposits or interest (on loan payments) to enter. In such a case, the bank will immediately raise this amount from another bank with an interest. the rate equal to or higher than the Federal funds rate.
Raising the rate of federal funds would deter banks from taking inter-bank lending, which in turn would make money more difficult to obtain. Conversely, dropping interest rates will encourage banks to borrow money and therefore invest more freely. This interest rate is used as a regulatory tool to control how free the US economy operates.
By setting a higher discount rate, the Federal Bank forbids banks from taking funds from Federal Bank, but placing itself as the last lender.
Comparison with LIBOR
Although the London Interbank Offered Rate (LIBOR) and federal funds rate are related to the same actions, namely interbank loans, they differ from each other, as follows:
- The target federal funds rate is the target interest rate set by the FOMC to implement the U.S. monetary policy.
- The federal (effective) funds rate is achieved through open market operations at the Domestic Trade Desk at the Federal Reserve Bank of New York primarily handling domestic securities (US Treasury and federal agencies).
- LIBOR is based on a questionnaire in which a number of banks guess the rate at which they can borrow money from other banks.
- LIBOR may or may not be used to get business terms. This was not corrected previously and is not intended to have macroeconomic consequences.
Market predictions
Considering the widespread impact of changes in the federal funds rate can have dollar value and loan amounts for new economic activity, the Federal Reserve is closely watched by the market. Option price contracts on the fed funds futures (traded on the Chicago Board of Trade) can be used to infer market expectations of future Fed policy changes. Based on the 30-day Fed Fund Futures CME Group, which has long been used to express a market view of possible changes in US monetary policy, the FedWatch CME Group tool allows market participants to see the possibility of a Fed Fed rise coming.. A set like implied probability is published by Fed Cleveland.
History level
On March 21, 2018 the target range for the Federal Funds Rate was 1.50-1.75%. This is the sixth increase in target levels since tightening started in December 2015.
The last full cycle of interest rate hikes occurred between June 2004 and June 2006 as tariffs continued to rise from 1.00% to 5.25%. The target rate remained at 5.25% for more than a year, until the Federal Reserve began to lower interest rates in September 2007. The last cycle of monetary policy easing through this rate was conducted from September 2007 to December 2008 as the target rate fell from 5.25% to range of 0.00-0.25%. Between December 2008 and December 2015 the target rate remained at 0.00-0.25%, the lowest level in the history of the Federal Reserve, in reaction to the financial crisis of 2007-2008 and beyond. According to Jack A. Ablin, head of investment at Harris Private Bank, one of the reasons for this unprecedented step has a range, not a certain level, is because a 0% rate could have problematic implications for money market funds, whose costs could then exceed results.
Explanation of federal funds rate decision
When the Federal Open Market Committee wants to reduce interest rates, they will increase the money supply by buying government securities. When additional inventories are added and others remain constant, prices usually fall. The price here is the interest rate (cost of money) and specifically refers to the Federal Fund Rate. Conversely, when the Committee wants to increase the Fed Funds Rate, they will instruct the Desk Manager to sell government securities, thereby taking the money they generate from the proceeds out of the circulation and reducing the money supply. When the supply is taken and the other remains constant, the price (or in this case the interest rate) will usually go up.
The Federal Reserve has responded to a potential slowdown by lowering the federal funds target during the recession and other periods of lower growth. In fact, the recent decline of the Committee preceded the recession, to stimulate the economy and dampen the downfall. Reducing the Fed Funds Rate makes money cheaper, allowing the entry of credit into the economy through all types of loans.
The related chart below shows the relationship between S & amp; P 500 and interest rates.
- July 13, 1990 - September 4, 1992: 8.00% -3.00% (Including 1990-1991 recession)
- February 1, 1995 - November 17, 1998: 6.00-4.75
- May 16, 2000 - June 25, 2003: 6.50-1.00 (Including recession in 2001)
- June 29, 2006 - (October 29, 2008): 5.25-1.00
- 16 Dec 2008 - 0,0-0,25
- Dec 16, 2015 - 0.25-0.50
- December 14, 2016 - 0.50-0.75
- Mar 15, 2017 - 0.75-1.00
- June 14, 2017 - 1.00-1.25
- December 13, 2017 - 1.25-1.50
Bill Gross of PIMCO suggested that in the previous 15 years ending in 2007, in every instance where the fed rate is higher than the nominal GDP growth rate, assets such as stocks and housing fell.
International effects
The low level of federal funds makes investing in developing countries like China or Mexico more attractive. A high level of federal funds makes investments outside the United States less attractive. The very low level of federal funding rates from 2009 in the future leads to increased investment in developing countries. When the United States begins to return to higher levels by 2013, investment in the United States becomes more attractive and the level of investment in developing countries is beginning to decline. This value also affects currency values, higher rates that increase the value of the US dollar and lower the value of currencies like the Mexican peso.
See also
- The Austrian Business Cycle Theory
- Bank Interest Rate
- Request Management
- Eonia
- The exchange equation
- Euro Interbank Offered Rate
- Probability of federal funds
- Federal Reserve Economic Data
- Monetary policy
- The US mortgage industry
- Official cash value
- Official bank rates
- Real interest rate
- SARON
- SONIA
- Taylor Rule
- The zero interest policy
References
External links
- Historical Data: Effective Federal Rate Fund (interactive chart) from the Federal Reserve Bank of St. Louis
- Federal Reserve Web Sites: Federal Funds Historical Rate Data (including current rates), Monetary Policy and Open Market Operations
- The MoneyCafe.com page with Fed Funds Rate and historical charts and graphics
- Historical graphics
- Historical data (since 1954) compares the growth rate of US GDP versus US Fed Funds Rate - in the form of a graph/graph
- Federal Reserve Bank of Cleveland: Predicted Fed Rate
- Federal Funds Rate data including daily daily effective rate and Target rate
Source of the article : Wikipedia
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