FED RATE In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight.[1] Changing the target rate is one form of open market operations that the Chairman of the Federal Reserve uses to regulate the supply of money in the U.S. economy.[ APPLICATIONS Interbank borrowing is essentially a way for banks to quickly raise capital. For example, a bank may want to finance a major industrial effort but not have the time to wait for deposits or interest (on loan payments) to come in. In such cases the bank will quickly raise this amount from other banks at an interest rate equal to or higher than the Federal funds rate. Raising the Federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure. Conversely, dropping the interest rates will encourage banks to borrow money and therefore invest more freely.[3] Thus this interest rate acts as a regulatory tool to control how freely the US economy, and by consequence world economy, operates. By setting a higher discount rate the Federal Bank discourages banks from requisitioning funds from the Federal Bank, yet positions itself as a source of last resort The Federal Reserve has responded to potential slow-down by lowering the target Federal funds rate during the recessions and other periods of lower growth. In fact the federal reserve lowering has recently predated
FED RATEIn the United States, the federal funds rate is the
interest rate at which private depository institutions (mostly
banks) lend balances (federal funds) at the Federal Reserve to
other depository institutions, usually overnight.[1] Changing the
target rate is one form of open market operations that the Chairman
of the Federal Reserve uses to regulate the supply of money in the
U.S. economy.[APPLICATIONSInterbank borrowing is essentially a way
for banks to quickly raise capital. For example, a bank may want to
finance a major industrial effort but not have the time to wait for
deposits or interest (on loan payments) to come in. In such cases
the bank will quickly raise this amount from other banks at an
interest rate equal to or higher than the Federal funds
rate.Raising the Federal funds rate will dissuade banks from taking
out such inter-bank loans, which in turn will make cash that much
harder to procure. Conversely, dropping the interest rates will
encourage banks to borrow money and therefore invest more
freely.[3] Thus this interest rate acts as a regulatory tool to
control how freely the US economy, and by consequence world
economy, operates.By setting a higher discount rate the Federal
Bank discourages banks from requisitioning funds from the Federal
Bank, yet positions itself as a source of last resort
The Federal Reserve has responded to potential slow-down by
lowering the target Federal funds rate during the recessions and
other periods of lower growth. In fact the federal reserve lowering
has recently predated recessions.[6]. The charts show the impact on
S&P 500 and short and long interest rates.July 13, 1990-Sept 4,
1992: 8.00% to 3.00% (Includes 1990-1991 recession) Feb 1, 1995-Nov
17, 1998: 6.00 - 4.75 May 16, 2000- June 25, 2003: 6.50- 1.00
(Includes 2001 recession) June 29, 2006- (Mar. 18 2008):
5.25-2.25
