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"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 t

"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.)

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.)