Section 2: Understand how the Fed Intercedes the Market
“Understand how the FED Intercedes the Market”
- Understanding the Federal Reserve (FED) > Section II - Understand how the Fed Intercedes the Market
Understanding the Federal Reserve (FED) > Interactive Video Lectures > Section II – Understand how the Fed Intercedes the Market
- The rate at which banks borrow and lend money from each other in the US is the Fed Funds Rate, also known as the interbank rate.
- When the press talks about the Fed raising and lowering interest rates, this is the interest rate that we’re talking about.
- As we’ve stressed in module one, this is the interest rate that has been down at 0 since 2010.
- Now just to quickly highlight some of the other rates associated with this short end of the market:
- The discount rate is the rate that banks can borrow from the fed.
- The fed is the lender of last resort, the way we have the safety of our monetary and our banking system is the fact that if banks get into trouble they can borrow from the fed and when you do you are borrowing at the discount rate.
- Since 2010 the discount rate has been at 50 basis points.
- Meaning the Fed funds rate is lower than the discount rate today.
- The LIBOR rate is the London Interbank Offering Rate.
- Just like the fed funds rate is the rate that banks borrow and lend from each other here in the U.S., in London banks borrow at the LIBOR rate.
- One big difference about LIBOR over Fed funds as an interbank rate is that our Fed only accepts dollars.
- The vast majority of bonds that we issue here in the US are fixed rate, while in Europe most of the bonds are floating rate.
- We’re starting to see more floating rate come into the US market.
- The most common benchmark that those interest rates are based off of is this LIBOR rate.
- Financial institutions were mismanaging this rate and misquoting this rate.
- Deutsche Bank, Barclays had paid major fines relative to how they were trying to adversely impact the LIBOR rate.