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Index type: Federal funds rate, % |
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Index: Federal funds rate, %
Organization responsible for index calculation: The Federal Reserve System
Index description
Federal Reserve interest rate policy
Authority for interest rate decisions is divided between the Board of Governors of the Federal Reserve (Board) and the Federal Open Market Committee (FOMC). The Board decides on changes in discount rates after recommendations submitted by one or more of the regional Federal Reserve Banks. (The Board also decides on reserve requirements and other formal regulations. Board members are also members of the FOMC.) The FOMC decides on open market operations, including the desired levels of central bank money (alternatively referred to as federal funds, bank reserves, outside money, base money) or the desired federal funds market rate.
The Federal Reserve Bank of New York (FRBNY) actually executes open market operations, using outright sales/purchases of government securities or, more frequently, repurchase agreements. The FRBNY usually intervenes in the market 1 time each day. It does so by dealing with selected large commercial banks (i.e. primary dealers in government securities).
Until January 2003 the Fed set the discount rate consistently somewhat below the desired federal funds rate, relying on non-pecuniary influences to restrain banks from borrowing cheap reserves through the discount window. In January 2003 the Fed changed the operation of the discount rate by setting it at a penalty rate (100bp primary credit rate - 150bp secondary credit rate) above the desired federal funds rate.
Russian extended description
English extended description
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