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These two rates serve different purposes. The Fed Funds rate is the rate at which banks earn interest on money held there (so keeping it low encourages banks to
by kevindkeogh 9y ago
These two rates serve different purposes. The Fed Funds rate is the rate at which banks earn interest on money held there (so keeping it low encourages banks to not keep it there, raising it does the opposite).
LIBOR (and there are different LIBORs for different currencies and maturities, the main one is USD 3-month) is the rate that banks lend each other on an unsecured basis. Technically, each bank determined their own LIBOR based on how they see the market and what they believe they can borrow at (hence our problems).
The important thing about LIBOR is that many trillions in notional of derivatives use it as a reference, so changing it has very real impact for all market participants (including pension funds, etc.). Even floating rate loans are often based on LIBOR.
- Suncho 9y agoI think you may be confusing Fed Funds with Interest on Reserves. Fed Funds are unsecured overnight loans between banks. In the aftermath of 2008, banks have a lot of reserves and trading volume in the Fed Funds market has decreased significantly. It's arguably not an important rate to pay attention to anymore, but the Fed still claims to be targeting it (indirectly through open market operations) Interest on Reserves is interest paid by the Fed to banks for holding reserves at the Fed. This is a new thing that was implemented in the wake of the 2008 crisis and quantitative easing.
- kevindkeogh 9y agoI was, thank you for the clarification!