5 ms·

> The Fed (not FED, BTW) doesn't "set" the rates, but has policies (including IORB, or what you call the federal reserve rate) The Fed does explicitly set cert

> The Fed (not FED, BTW) doesn't "set" the rates, but has policies (including IORB, or what you call the federal reserve rate) The Fed does explicitly set certain interest rates. IORB is an interest rate that gets paid out every single day to market participants. “Federal reserve rate” does not exist; what you’re probably referring to is the fed funds rate. The Fed sets a target range for this, and, if the effective fed funds rate does not stay within the target corridor, the Fed will conduct open market operations to push it there.

monktastic1 5y ago
"Federal reserve rate" is not my term. My parent comment coined it and defined it as "the interaste (sic) rate paid to banks every day for their deposits with the FED", which is the IORB. I appreciate the thorough and accurate response you gave (and which I learned from). The distinction I've been trying to make is that the Fed has no mechanism to enforce the rate banks offer to each other or to consumers -- as in, there's no legal enforcement anywhere. Instead, they have various levers that predictably cause rational actors to voluntarily change their own rates. Maybe this has always been obvious to you, but it wasn't to me at some point. If you still feel this is "blatantly incorrect information," I'm certainly open to learning more.
- nickles 5y ago
  I apologize for my brusque response, it wasn’t constructive. > the Fed has no mechanism to enforce the rate banks offer to each other or to consumers -- as in, there's no legal enforcement anywhere The Fed can affect rates directly by transacting directly with the market (open market operations). Ultimately, all bond prices (and correspondingly yields) are driven by supply and demand. The Fed has unlimited capacity to purchase bonds (driving yields down) and currently has about $9T of bonds that it can sell (pushing rates up). The Fed doesn’t need to force any market participant to change yields, it can do it mechanically. The Bank of Japan explicitly does this. The Fed also has regulatory authority over US banks, which conceivably can impact rates (think RRR and stress tests). It (along with other regulators like FDIC) can even specify the composition of bank portfolios (which determines where flows go). > Instead, they have various levers that predictably cause rational actors to voluntarily change their own rates Certainly rational actors respond to Fed actions of their own volition, but don’t underestimate the mechanical aspects of markets (e.g. dealers need to hedge risk and changes in rates change duration, risk parity funds and CTAs have mandates to follow, etc.)
soVeryTired 5y ago
You're talking past each other, specifically on what it means to "set interest rates". GP is correct in that the fed funds rate (the one that makes headlines and is used for policy) isn't literally _set_ by fiat: the Fed just intervenes in the interbank money market to ensure it stays in a specified range. It has near unlimited capacity to intervene so the fed funds rate only ever strays a tiny amount outside that range, and even then it's an exceptional circumstance. On the other hand the parent is correct in that the Fed literally sets a lot of other rates that are used for financial plumbing. Nickles I'm sure you know this already but I'm trying to clarify so that others don't get confused by an already confusing topic.
- nickles 5y ago
  Thanks, the more clarification the better. There are so many moving parts, many of which aren’t understood well, that it can be very difficult to explain exactly how everything fits together. I always recommend the book Floored! by George Selgin for those who want to understand current Fed policy. It’s a few years old at this point but does a fantastic job explaining things.

monktastic1 5y ago

"Federal reserve rate" is not my term. My parent comment coined it and defined it as "the interaste (sic) rate paid to banks every day for their deposits with the FED", which is the IORB. I appreciate the thorough and accurate response you gave (and which I learned from). The distinction I've been trying to make is that the Fed has no mechanism to enforce the rate banks offer to each other or to consumers -- as in, there's no legal enforcement anywhere. Instead, they have various levers that predictably cause rational actors to voluntarily change their own rates. Maybe this has always been obvious to you, but it wasn't to me at some point. If you still feel this is "blatantly incorrect information," I'm certainly open to learning more.

nickles 5y ago
I apologize for my brusque response, it wasn’t constructive. > the Fed has no mechanism to enforce the rate banks offer to each other or to consumers -- as in, there's no legal enforcement anywhere The Fed can affect rates directly by transacting directly with the market (open market operations). Ultimately, all bond prices (and correspondingly yields) are driven by supply and demand. The Fed has unlimited capacity to purchase bonds (driving yields down) and currently has about $9T of bonds that it can sell (pushing rates up). The Fed doesn’t need to force any market participant to change yields, it can do it mechanically. The Bank of Japan explicitly does this. The Fed also has regulatory authority over US banks, which conceivably can impact rates (think RRR and stress tests). It (along with other regulators like FDIC) can even specify the composition of bank portfolios (which determines where flows go). > Instead, they have various levers that predictably cause rational actors to voluntarily change their own rates Certainly rational actors respond to Fed actions of their own volition, but don’t underestimate the mechanical aspects of markets (e.g. dealers need to hedge risk and changes in rates change duration, risk parity funds and CTAs have mandates to follow, etc.)

soVeryTired 5y ago

You're talking past each other, specifically on what it means to "set interest rates". GP is correct in that the fed funds rate (the one that makes headlines and is used for policy) isn't literally _set_ by fiat: the Fed just intervenes in the interbank money market to ensure it stays in a specified range. It has near unlimited capacity to intervene so the fed funds rate only ever strays a tiny amount outside that range, and even then it's an exceptional circumstance. On the other hand the parent is correct in that the Fed literally sets a lot of other rates that are used for financial plumbing. Nickles I'm sure you know this already but I'm trying to clarify so that others don't get confused by an already confusing topic.

nickles 5y ago
Thanks, the more clarification the better. There are so many moving parts, many of which aren’t understood well, that it can be very difficult to explain exactly how everything fits together. I always recommend the book Floored! by George Selgin for those who want to understand current Fed policy. It’s a few years old at this point but does a fantastic job explaining things.