Bank funds held in term deposits at the Fed would not be available for the federal funds market.
Borrowing from other participants in the Federal Funds market merely redistributes existing reserves.
Having the discount rate higher meant that, in normal times, borrowing in the Federal Funds market would be less expensive than borrowing from the Fed.
But there is a huge difference between borrowing from the Fed at near zero interest rates and borrowing at that rate in the Federal Funds market.
The Fed would use the discount rate rather than the federal funds market to supply or withdraw credit in response to any imbalance between supply and demand for it.
However, this pattern appears also to have resulted from the fact that some large lenders in the federal-funds market, notably government-sponsored enterprises such as Fannie Mae and Freddie Mac, are ineligible to receive interest on balances held at the Fed, and thus they have an incentive to lend in that market at rates below what the Fed pays banks.
For example: Beal thinks the federal bailout of money-market funds was necessary.
This includes debt guaranteed by the federal government, like money market funds and bank CDs, and the obligations of government agencies like Ginnie Mae, Freddie Mac and Fannie Mae mortgage debt.
For this reason, ad hoc responses will still be critical, such as last week's federal guarantees for money-market funds, Fed loans to banks to buy asset-backed commercial paper and, on Sunday, approval of the remaining two big independent investment banks, Morgan Stanley and Goldman Sachs, to become Fed-regulated bank holding-companies whose investment bank units can now borrow from the Fed on the same terms as other banks.
When the Fed pours money into the system with the purchase of mortgage-backed securities, combined with guidance from the Federal Open Market Committee that the federal funds rate will remain near zero at least through mid-2015, it depresses yields on debt instruments.
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In times of less turmoil, the central bank generally only deals with primary dealers, a group of 20 big banks and brokerage houses with which the New York Federal Reserve conducts its open-market operations, buying and selling government securities to guide the federal funds rate.
If changes in the federal-funds rate do not feed through into market rates, the dollar or share prices, they will have little effect upon the economy.
In view of the weakening outlook and the downside risks to growth, the Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures.
In the area of monetary policy, the Federal Open Market Committee (FOMC) has moved aggressively, cutting its target for the federal funds rate by a total of 225 basis points since September, including 125 basis points during January alone.
The Federal Open Market Committee voted to keep its fed funds target rate unchanged at a range of zero to 0.25% Wednesday, but did acknowledge the improving economic environment.
That implication could be drawn from the recently released minutes of the Fed's last Open Market Committee meeting, during which the federal funds rate was cut from 2.25% to 2%.
Has the Federal Reserve run out of bullets? that implication could be drawn from the recently released minutes of the Fed's last Open Market Committee meeting, during which the federal funds rate was cut from 2.25% to 2%.
The next step would be to prime the market by modifying their forward guidance on the federal funds rate while beginning to withdraw reserves from the system.
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Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate.
Their database is composed of Treasury issues, federal agency issues, mortgages, corporate bonds, municipal bonds, money market funds and asset-backed securities.
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The U.S. Federal Reserve also occasionally makes loans to the banking system by pumping money into its funds market.
Many economists believe if the financial market crisis worsens, the Fed will soon move to cut the federal funds rate as well.
The official monetary policy rate, or federal funds rate remains at zero to 0.25 basis points and the Federal Open Market Committee has suggested rates will remain at that level through mid-2013.
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In other words, if the FOMC announces that it wants the Federal Funds rate to be 4 percent rather than the existing 5 percent, the amount of open market purchases needed to achieve this target is likely a range rather than a point estimate.
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Those who use money market funds know they are not risk-free and that they come with no federal guarantees.
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