What's the federal funds rate?
In the Federal Reserve System of the United States, each member bank must maintain a certain amount of reserves (funds that must be held to ensure credit control and depositors' daily access) within two weeks with Wednesday as the end date; However, if the bank deposit balance of each member changes from time to time, the reserve may be surplus or insufficient at maturity; When a bank's reserve is insufficient, it can make up for it through other commercial banks or borrowing from federal funds; This involves the issue of loan interest; This does not refer to the interest of bank deposits, but the interest of interbank lending; Short-term lending like this is usually returned the next day or within a week, and the interest rate is also called overnight lending rate; The federal funds rate is the interest rate in the American interbank market.
How does the federal funds rate work? What does it have to do with the bank deposit interest rate?
This change in loan interest rate can sensitively reflect the surplus and shortage of inter-bank funds; By adjusting the loan interest rate, the capital cost (interest payment cost) of commercial banks can be directly affected, and the surplus and deficiency of funds in the interbank lending market can be transferred to industrial and commercial enterprises, thus affecting consumption, investment and national economy. Its mechanism should be as follows:
First, the Federal Reserve lowered the federal funds rate.
Lending between commercial banks will turn to lending between commercial banks and the Federal Reserve, because the cost of lending to the Federal Reserve is lower, and the lending rate of the whole market will drop accordingly (the competition between banks for lending will lead to the overall decline). (At this time, the money is relatively loose, and the interest on bank deposits is usually unchanged or reduced. )
Second, the Federal Reserve raised the federal funds rate.
If there is a shortage of funds in the market, the federal funds rate itself will be under upward pressure, so it will inevitably rise with the Fed's lending rate |. At this time, the economy is excessively tense (when the market is further short of funds, the bank deposit rate will inevitably rise, so this situation is generally difficult to occur, and the Fed has considerable requirements for inflation every time it raises interest rates).
If there is downward pressure on the federal funds interest rate itself when the market funds are excessively abundant, then raising the loan interest rate will also raise the interest rate, which is conducive to maintaining economic stability and avoiding excessive inflation and depreciation (for example, the current open policy of the United States stimulates the economy, increases infrastructure investment, and injects a lot of funds into the market; By raising interest rates by the Federal Reserve, we can maintain stability and avoid excessive devaluation of the currency.