When it comes to U.S. monetary policy, The Fed is the clique running things. The
Fed
, or
Federal Reserve Bank
has the authority to regulate the U.S. economy through a number of tricks in their Gucci bag.
In their quest to manipulate monetary policy, the Fed aims to use their powers and pixie dust for good through the following rates:
Discount Rate
- This is the interest rate that banks pay on short-term loans from the Federal Reserve Bank.
Federal Funds Rate
- This is usually the rate that Wall Street nerds are referring to when they talk about the Fed raising or lowering rates. The Fed doesn’t directly raise or lower this rate, but it is the most powerful tool the Fed has (sort of like a magic wand) to affect policy. The Fed will buy and sell U.S. government securities in an effort to affect the Federal Funds Rate which is the rate at which banks borrow reserves from each other. The Fed sets a target for this rate and let’s the market sort out the actual details.
All banks have to keep a certain amount of money on reserve. This is called the reserve requirements. But much like Kanye, they frequently fall short of expectations of this requirement. So, they then have to borrow from their friends (other banks). The Fed Funds Rate is a pretty big deal because over time the Fed can have an effect on all other rates.
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