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The FOMC(Federal Open Market Committee) is the policy arm of the Fed. They can not and do not set interest rates directly. What they do is adjust the money supp

The FOMC(Federal Open Market Committee) is the policy arm of the Fed. They can not and do not set interest rates directly. What they do is adjust the money supply to try to influence interest rates towards a target range. One of the tools they have to do this is the the federal funds rate which is the rate that banks charge each other to borrow money overnight in order to meet their reserve requirements. The Fed Funds rate is one of the tools they have their disposal. The FOMC meets 8 times and year releases this guidance.

monktastic1 5y ago
As I mentioned in a sibling comment, there hasn't been a reserve requirement for two years. I'm not sure what's primarily driving the interbank borrowing now.
- sbelskie 5y ago
  But doesn’t the Fed still pay on reserves held? Even if it’s not required, the Fed increasing the rate paid on reserves would put upward pressure on other rates, otherwise banks would just take the IORB rate.
- bogomipz 5y ago
  The Fed Funds rate is still the reference for policy but the Fed has been using a new framework called "ample reserves" since the latter part of 2020. See: "How Does the Fed Influence Interest Rates Using Its New Tools?" https://www.stlouisfed.org/open-vault/2020/august/how-does-fed-influence-interest-rates-using-new-tools https://www.stlouisfed.org/open-vault/2020/august/how-does-f...
  - nickles 5y ago
    > the Fed has been using a new framework called "ample reserves" since the latter part of 2020 It’s been using an ample reserve regime for much longer than that. The Fed received congressional approval to implement a floor system around 2007 (it had been seeking it since the 80’s, I think), and has used it since the GFC. Are you possibly referring to the average inflation targeting framework?
    - bogomipz 5y ago
      Indeed I meant 2007, 2020 was the year the reserve requirements were adjust to a zero ratio which I was responding to in the earlier post.

monktastic1 5y ago

As I mentioned in a sibling comment, there hasn't been a reserve requirement for two years. I'm not sure what's primarily driving the interbank borrowing now.

sbelskie 5y ago
But doesn’t the Fed still pay on reserves held? Even if it’s not required, the Fed increasing the rate paid on reserves would put upward pressure on other rates, otherwise banks would just take the IORB rate.
bogomipz 5y ago
The Fed Funds rate is still the reference for policy but the Fed has been using a new framework called "ample reserves" since the latter part of 2020. See: "How Does the Fed Influence Interest Rates Using Its New Tools?" https://www.stlouisfed.org/open-vault/2020/august/how-does-fed-influence-interest-rates-using-new-tools https://www.stlouisfed.org/open-vault/2020/august/how-does-f...
- nickles 5y ago
  > the Fed has been using a new framework called "ample reserves" since the latter part of 2020 It’s been using an ample reserve regime for much longer than that. The Fed received congressional approval to implement a floor system around 2007 (it had been seeking it since the 80’s, I think), and has used it since the GFC. Are you possibly referring to the average inflation targeting framework?
  - bogomipz 5y ago
    Indeed I meant 2007, 2020 was the year the reserve requirements were adjust to a zero ratio which I was responding to in the earlier post.