# What does it mean when the federal reserve sets interest rates Summary:: # Notes ## Links ## Backlinks > [!Info]- Ignore dataview >## Backlink >Ignore this dataview. Plugins don't work on the website >```dataview Table Status, type as "Type" from [[]] and !outgoing([[]]) sort file.name asc >``` --- # References ==Quora== **Open In App****Sign In** ==U.S. Monetary Policy== ==U.S. Federal Reserve== ==Interest Rates== ==Economics== **What does it mean when the federal reserve sets interest rates?** ==Still have a question? Ask your own!== **What is your question?** ==ad by Zoho== **Project management, as effective as it gets.** ==Plan, track, & collaborate using the preferred project management software of more than a million users.== ==Sign Up== ==You dismissed this ad.== ==The feedback you provide will help us show you more relevant content in the future.== **Undo** ==3 Answers== ==Paul Sutton====, Stock Trader, electrical engineer== ==Answered Mar 25== ==· Author has== **3.9k** ==answers and== **1.8m** ==answer views== ==Let’s clear some of the nonsense.== ==The Fed only sets one interest rate. Period. The rate they manage is the suggested rate that member banks charge one another for overnight loans. I say “suggested” because in actuality, the member banks ‘bid’ for the right to make these loans, and so the rate varies from day-to-day, sometimes lower than the fed funds rate, sometimes slightly higher. The Fed also runs the so-called ‘Fed window” which is where a member bank can borrow money overnight directly from the Fed if no member bank can, or will make the loan.== ==All other interest rates, for instance, on treasuries of any duration, are set in the treasury markets. Treasuries have fixed face-values, meaning that on maturity, they can be redeemed for the amount of money printed on their face. Because these debt instruments have specific face values, as their price goes up, their rate of return goes down, and as their price goes down, their rate of return goes up. You can think of ‘rate of return’ as ‘interest rate.’== ==Treasuries, like bonds, are sold at auction, that is, sold on the bond exchange where potential buyers put in a bid, and potential sellers ‘ask’ a specific amount of money for their treasuries. When buyer and seller agree on price, and exchange takes place, and the price paid determines the interest, or rate of return.== ==If you think that all treasuries are sold to be held to maturity as an investment, you’d be wrong. Treasury traders attempt to “buy low and sell high,” meaning they want to pay as little as they can for any given treasury, and then turn around and sell it for as much as they can. But with so many traders, and the highest bidder winning (always), this tends to keep bond prices high, and hence, interest rates low.== ==Even the Fed sells their treasuries at auction. Big commercial banks buy them directly from the Fed, then turn around and try to sell them for more than what they paid for them.== ==The Fed, in other words, has no direct control over “interest rates” as some people seem to think. The Fed actually has less power than most people think, as well. When they “raise rates” on the overnight lending rate, the Fed hopes that the treasury and bond markets are listening. The bond markets do listen, of course, but then they do pretty much what they want to do. In other words, the Fed can speak in solemn tones and at a measured pace, and hope that the seriousness with which they take themselves is somehow conveyed to the bond markets. Sometimes it does; sometimes it doesn’t. Bond markets have a lot of other “outside influences;” the Fed is just one of them.== ==The Fed does not “set interest rates” in the way most people not familiar with the Fed or the bond and treasury markets seem to think.== ==221 Views== ==promoted by Chime Banking== **This bank account pays you up to two days early.** ==Finally, a bank account with no unnecessary fees that pays you up to 2 days early. Make the switch today.== ==Apply Now== ==You dismissed this ad.== ==The feedback you provide will help us show you more relevant content in the future.== **Undo** ==More Answers Below. Related Questions== ==Why do we allow Federal Reserve to set interest rates?== ==886 Views== ==Why does the Federal Reserve artificially set interest rates? Wouldn't the market organically set interest rates?== ==1,524 Views== ==Why does the Federal Reserve keep increasing interest rates, and what does this mean for the economy?== ==549 Views== ==What rate does the federal reserve set?== ==517 Views== ==What actually happens when Federal Reserve raises the interest rate? What and who is affected?== ==291 Views== ==Other Answers== ==Buddha Buck====, studied at University at Buffalo== ==Answered Jun 10 2017== ==· Author has== **2.7k** ==answers and== **2.3m** ==answer views== ==The Fed has a number of jobs. It is tasked with using monetary policy (controlling the money supply) to both promote economic growth and to control inflation.== ==The money supply is increased by banks making loans, and the willingness of people to take out bank loans is influenced by the interest rates that banks charge. So the Fed knows that high interest rates stifle economic growth, and low interest rates encourage economic growth. Low interest rates can also lead to inflation, and to economic bubbles, so its not good to have too low of interest rates.== ==So the Fed does a number of things to try to influence the interest rates that banks charge for loans.== ==First, banks have obligations to the Fed itself. The Fed requires that banks have a certain amount of their assets held in reserve at the Fed itself. This is money that the banks can’t loan out, and it can be hard to ensure that they have exactly the right amount in the Fed each night when they are supposed to. This isn’t a problem: the Fed will lend them extra money to meet their reserve requirement, overnight — for a fee. This is an interest rate that the Fed can set directly. They can say “OK, we’ll lend you $130M overnight to meet your reserve, for 0.5% annual interest, so tomorrow morning you’ll owe us $130M, plus $1781 in interest”.== ==But that’s just one of the interest rates that gets talked about, and not the main one. The main one is the “target interest rate”, which is not one that they can directly set, but is one they advertise that their policies will try to match. So if the actual interest rate they are tracking is higher than the target interest rate, they’ll do things, like more QE, to try to increase the money supply and drive the interest rate down. If the interest rate they are tracking is lower than the target interest rate, they will take actions to restrict the money supply to try to drive the target rate up.== ==237 Views ·== ==View Upvoters== ==promoted by BetterFinance== **How one man raised his credit score 277 points in months.** ==What gets measured gets managed. This simple approach allowed this man to turn his credit score around.== ==Read More== ==You dismissed this ad.== ==The feedback you provide will help us show you more relevant content in the future.== **Undo** ==Robert Shuler====, works at NASA Johnson Space Center (1974-present)== ==Answered Nov 12, 2017== ==· Author has== **1.3k** ==answers and== **707.6k** ==answer views== ==It means the Fed will loan money overnight to member banks at that rate.== ==Since the Fed controls the money supply, it is not subject to bankruptcy or default, and can maintain that rate regardless of market conditions. Of course, if it does so unwisely, the economy may be harmed. In calculations that I have done, the Fed most often errs by moving rates (up or down) too fast, and staying in one state or the other too long. As long as it correctly guesses whether the economy is heating up or cooling off, and moves at 25–50 basis points a year, no more, things work out pretty well.== ==116 Views== ==View More== ==Related Questions== ==What does it mean that the Federal Reserve is keeping the interest rates steady?== ==2,016 Views== ==Why is the Federal Reserve interest rate trend negative instead of flat?== ==2,121 Views== ==How do interest rates set by the federal reserve impact the stock market?== ==614 Views== ==What interest rate does the Federal Reserve target?== ==1,469 Views== ==Why does the federal reserve adjust interest rates?== ==945 Views== ==Where can I sign up for the Federal Reserve interest rate alert?== ==1,002 Views== ==Can banks borrow money from the Federal Reserve at a low interest rate and lend it?== ==1,453 Views== ==Is it possible for society to raise interest rates without reliance on the federal reserve rate?== ==1,404 Views== ==What could happen if the U.S. Federal Reserve raised interest rates too slowly?== ==605 Views== ==To what degree does the Federal Reserve influence interest rates?== ==4,105 Views== ==Does the Federal Reserve have a lot to lose if they increase interest rates?== ==2,426 Views== ==How does the Federal Reserve make money?== ==1,207 Views== ==What drives the decision of the Federal Reserve to either increase or decrease the interest rates?== ==539 Views== ==Why does the Federal Reserve keep interest rates low?== ==2,996 Views== ==How often does the Federal Reserve change the discount and the federal fund rate?== ==1,058 Views== ==About== ==·== ==Careers== ==·== ==Privacy== ==·== ==Terms== ==·== ==Contact== ==250==