As the largest participant in the interbank lending market, the Fed has no ability to adjust the interbank lending rate from the beginning, because it can only adjust its own lending rate, so it can determine the federal funds rate of the whole market. The mechanism should be as follows: when the Federal Reserve reduces its loan interest rate, the loans between commercial banks will be transferred to the loans between commercial banks and the Federal Reserve, because the cost of borrowing from the Federal Reserve is lower, and the loan interest rate of the whole market will be reduced accordingly. If the Fed raises the loan interest rate, the federal funds rate itself will be under upward pressure in the case of shortage of market funds, so it will inevitably rise with the Fed's loan interest rate. In the case of relatively loose market funds, if the Fed raises the loan interest rate, commercial banks that borrow from the Fed will turn to other commercial banks, while the Fed's loan interest rate will remain unchanged. However, the Fed can sell treasury bonds in the open market and absorb the excess reserves of commercial banks, which leads to the shortage of funds in the interbank lending market and forces the federal funds rate to rise simultaneously with the Fed loan rate. Because the Fed has the ability to intervene in market interest rates in this way, its repeated operations will form reasonable market expectations. As long as the Fed raises the loan interest rate, the whole market will follow suit, and then the Fed can directly announce the changes in the federal funds interest rate. As for whether the Fed should use other operational means to supplement it, it becomes less important.
Comparatively speaking, the change of rediscount interest rate can only affect those commercial banks that meet the requirements and qualifications of rediscount, and then affect the interbank lending rate through their excess reserve balance. Because there are limited commercial banks that can obtain rediscount funds, theoretically, these funds cannot be lent out for profit, which blocks the expansion effect of the decline of rediscount interest rate. Similarly, with the increase of rediscount interest rate, there may not be many commercial banks returning to the market, and the tension of commercial banks' overstaffing is limited, so it is difficult to give full play to its contraction effect. In this sense, the Fed's use of rediscount rate is a bit superficial, far less effective than adjusting the federal funds rate. This gives us important enlightenment. Perfecting the intervention, regulation and even decision-making of China's central bank on interbank lending rate is even more important than developing rediscount in the sense of regulation rather than stabilizing finance.