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I have a question about the federal funds rate that I haven't ever had a good explanation for. It is: To what extent is the fed funds rate set to match market

I have a question about the federal funds rate that I haven't ever had a good explanation for. It is: To what extent is the fed funds rate set to match market demand, and to what extent is it controlled completely independently of market demands? If anyone has a good answer, I would appreciate it a lot. To flesh out my question a little further, let's say that the fed decides one day to change the fed funds rate from 1.75% to 2%. They put the bonds up for auction and find out that they were only able to auction off the allotment of bonds at an effective rate of 1.8%. Is this typical? Or is it usually the case that the bond buyers will quickly hoover up whatever rate they are given? Maybe a more formal way to put it- is the elasticity of demand for these bonds low enough for the fed to have complete control over the fed funds rate such that they can set any interest rate they desire?

trailercamp 8y ago
https://en.m.wikipedia.org/wiki/Bond_vigilante https://en.m.wikipedia.org/wiki/Bond_vigilante
jonwachob91 8y ago
I don't think the Fed Fund Rate is controlled by bonds, but by money supply. They remove dollars from circulation until the borrowing rate rises to a pre-defined rate (such as 2%). Banks don't typically borrow from the Fed as it's viewed as a sign of being unable to borrow from another bank. It's part of the reason the Big Banks were forced by the Fed to ask for a loan during the 2008 crisis, so smaller banks could ask for loans without looking weak.
RobertoG 8y ago
From: http://bilbo.economicoutlook.net/blog/?p=34830 http://bilbo.economicoutlook.net/blog/?p=34830 "[..] the central bank (that is, the government) can always set bond yields at whatever level it chooses including zero." A different question is if institutional arrangements will allow it. But even when they not, if the crisis is big enough they will. See the example of the debt crisis in the Eurozone. It finished the day that governor of the European Central Bank decided to do "whatever it takes" (1), even if the operations that they are doing are technically illegal in the framework of the Eurozone. (1). https://qz.com/1038954/whatever-it-takes-five-years-ago-today-mario-draghi-saved-the-euro-with-a-momentous-speech/ https://qz.com/1038954/whatever-it-takes-five-years-ago-toda...
burkemw3 8y ago
The fed rate commonly publicized isn't a bond rate. It's like the rate on a personal checking account. It can vary at the fed's desire. See https://en.m.wikipedia.org/wiki/Federal_funds_rate https://en.m.wikipedia.org/wiki/Federal_funds_rate. Changing that rate does cause impacts on the rest of interest rates (e.g. bonds), though.
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trailercamp 8y ago

https://en.m.wikipedia.org/wiki/Bond_vigilante https://en.m.wikipedia.org/wiki/Bond_vigilante

jonwachob91 8y ago

I don't think the Fed Fund Rate is controlled by bonds, but by money supply. They remove dollars from circulation until the borrowing rate rises to a pre-defined rate (such as 2%). Banks don't typically borrow from the Fed as it's viewed as a sign of being unable to borrow from another bank. It's part of the reason the Big Banks were forced by the Fed to ask for a loan during the 2008 crisis, so smaller banks could ask for loans without looking weak.

RobertoG 8y ago

From: http://bilbo.economicoutlook.net/blog/?p=34830 http://bilbo.economicoutlook.net/blog/?p=34830 "[..] the central bank (that is, the government) can always set bond yields at whatever level it chooses including zero." A different question is if institutional arrangements will allow it. But even when they not, if the crisis is big enough they will. See the example of the debt crisis in the Eurozone. It finished the day that governor of the European Central Bank decided to do "whatever it takes" (1), even if the operations that they are doing are technically illegal in the framework of the Eurozone. (1). https://qz.com/1038954/whatever-it-takes-five-years-ago-today-mario-draghi-saved-the-euro-with-a-momentous-speech/ https://qz.com/1038954/whatever-it-takes-five-years-ago-toda...

burkemw3 8y ago

The fed rate commonly publicized isn't a bond rate. It's like the rate on a personal checking account. It can vary at the fed's desire. See https://en.m.wikipedia.org/wiki/Federal_funds_rate https://en.m.wikipedia.org/wiki/Federal_funds_rate. Changing that rate does cause impacts on the rest of interest rates (e.g. bonds), though.

deleted 8y ago
[deleted]