1. interest rate
Interest rate refers to the ratio of interest amount to total borrowed capital in a certain period. The factors that affect interest rates are mainly the marginal productivity of capital or the relationship between supply and demand of capital. Higher interest rates are conducive to absorbing funds, that is, funds flow to banks.
2。 reserve against deposit
Deposit reserve, also known as legal deposit reserve or deposit reserve, refers to the deposit prepared by financial institutions in the central bank to ensure the needs of customers to withdraw deposits and settle funds. The ratio of the deposit reserve required by the central bank to its total deposit is the deposit reserve ratio. The central bank adjusts the deposit reserve ratio. It can affect the credit expansion ability of financial institutions, thus indirectly regulating the money supply.
The adjustment of deposit reserve can adjust the liquidity of banks, that is, the funds available to banks. For example, the bank deposit amount is 100 yuan, the deposit reserve is 20%, and the available funds of the bank are only 80 yuan.
Second, the US federal funds rate refers to the interest rate in the US interbank lending market. It is the interest rate at which a deposit institution borrows overnight loans from another deposit institution with the funds in its hand, and it is the most important interest rate in the United States.
1. Its function
This interest rate change can sensitively reflect the surplus and shortage of inter-bank funds. By targeting and adjusting the interbank lending rate, the Federal Reserve can directly affect the capital cost of commercial banks and transfer the surplus and deficiency of funds in the interbank lending market to industrial and commercial enterprises, thus affecting consumption, investment and the national economy. 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.
2. Interest rate adjustment process
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.
Third, from your question, it is because there is upward pressure on the federal funds rate itself in the case of relative shortage of market funds, so the reserve is lowered to increase liquidity. This is different from our usual sense that interest rates and reserves move in the same direction.