The federal funds rate is what U.S. banks charge one another on overnight loans.
The central bank's monetary policy targets the federal-funds rate, which banks charge each other on overnight loans.
Which means there is much more demand for overnight loans on the repo market than for year-long loans.
So the cost of year-long loans is much lower than for overnight loans.
In its latest incarnation, the interest-rate ceiling on consumer loans is restricted to 5% above the Federal Reserve's discount rate the amount the Fed charges banks for overnight loans.
It is presumed that increases in the Fed's target rate for overnight loans are bad for stocks because high interest rates make the future earnings from corporations less valuable today.
The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.
The Fed also cut the discount rate, which it charges banks for overnight loans, 50 basis points to 5.25%, a sign the central bank is still concerned about the lingering effects of a credit crunch that has rocked the bond and loan markets.
While the Fed keeps the yield on overnight loans at 0% and investors price ten-year Treasury bonds as if prices will barely budge over the coming decade, inflation is lurking in many corners of the economy--like shipping, which accounts for 7% of gross domestic product.
The Fed cut its target on federal funds, the overnight interbank loans that form the floor rate for U.S. lending, to just 0.25%, down 75 basis points from the previous 1.0% level.
And if Congress does nothing, the interest rates on those loans will double overnight.
Interest rates on those loans will double overnight, starting on July 1st, if Congress does not act.
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Meanwhile, the duration of the loans will revert to the normal overnight period from 30 days come mid-March.
These kinds of things opened the door to unscrupulous practices -- loans with hidden fees and terms that meant your rate could double overnight.
But today, when banks are hoarding cash in case they need it and are unwilling to lend to each other for anything longer than a day at a time, loans lasting three months, for instance, are being replaced with overnight ones.
Plus, they were lending the money short (often only overnight) and the banks taking in those deposits were transforming them into longer term loans to their customers.
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