The most frequently quoted interest rate in the federal funds market is the effective federal funds rate. The Federal Reserve Bulletin defines the daily effective interest rate as: the weighted average interest rate traded through new york brokers.
Although the adjustment of the federal funds rate and rediscount rate was announced by the Federal Reserve, the methods are divided into administrative regulations and market functions, and the adjustment effects are also different, which may be an important reason why the federal funds rate gradually replaces the rediscount rate and plays a regulatory role.
The member banks of the Federal Reserve System (Fed) lend each other the federal funds rate to adjust the reserve position and daily liquidation.
Interest rate adjustment:
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.
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.
In the early morning of July 28th, 2022, the Federal Reserve announced the meeting statement of the Federal Open Market Committee (FOMC). The statement said that the Fed raised the target range of the federal funds rate by 75 basis points to 2.25%-2.50%, which was in line with market expectations.