Section 6: Wrapping Up

Now to be particular, I’ve used the terminology the Fed “sets” the Fed funds rate.
Well, let’s just be grammatically correct, they “target” the Fed funds rate.
Through the mechanisms that we were just talking about, through the recall market, through the coupon pass, what the Fed is actually doing is they are trying to get the supply of money in the marketplace at a certain level to achieve that interest rate.
You notice when the Fed said we’re bringing the Fed funds rate down to zero, they then had to inject liquidity into the marketplace to make that rate go down there.
When our Fed makes a declaration, this is where the new Fed funds rate will be when they go to change it next.
What we tend to see here in the US is as soon as the Fed makes that announcement the rate goes to that, because the marketplace knows the Fed is going to do what they need to do to get that rate there.
I do contrast that with other central banks that are not necessarily as efficient or as liquid, where the central bank might have a stated rate as to what the lending rate is, but they have not yet affected the amount of cash in circulation to get it there.
Hopefully doing away with some of the misnomers in the Fed, that the Fed doesn’t raise or lower interest rates, the FOMC raises and lowers interest rates.