DTT Buzz
Exclusive Market Analysis, Alerts and Commentary from the DaytradeTeam trading staff
Tuesday, August 07, 2007
Fed Funds Target Rate
The Federal Open Market Committee is responsible for Open Market Operations. Open Market Operations are the sale or purchase of (mainly) US Treasury Securities by the Fed.
When the Fed purchases or sells US Treasury Securities, it effect the FED FUNDS TARGET RATE. The Fed Funds Target Rate is the rate at which banks lend money to each other overnight at the Federal Reserve.
All banks are required to keep a certain amount of of money at the Federal Reserve, if for some reason or another one bank doesn't have the needed amount, it will borrow from another bank that has an excess. This market is called the Fed Funds Market, and the rate at which banks lend money to each other overnight is called the Fed Funds Rate.
The Federal Reserve has the job of regulating the Fed Funds Market (which effect M1, which in turn effects inflation), and can perform this function in two different ways. It can either have a set requirement of US Securities, which it wants to keep on hand, or it can have those securities sort of "float" in order to more fully control the Fed Funds Rate. That is why the anticipated rate is called the Fed Funds Target Rate.
When the Federal Open Market Committee adjusts the Fed Funds Target Rate, they are saying that they will adjust their portfolio (in the future) of US Treasury securities. This adjustment will effect the Fed Funds Market in such a way that the Fed Funds Target Rate and the Fed Funds Rate will come in line with each other.
The thing to keep in mind, is that the outside market (the entire world), instantly prices in any adjustment that the Federal Reserve makes, even though that adjustment takes time to complete.
Happy Trading
Keith Greff Jr
Jr Trade Analyst
When the Fed purchases or sells US Treasury Securities, it effect the FED FUNDS TARGET RATE. The Fed Funds Target Rate is the rate at which banks lend money to each other overnight at the Federal Reserve.
All banks are required to keep a certain amount of of money at the Federal Reserve, if for some reason or another one bank doesn't have the needed amount, it will borrow from another bank that has an excess. This market is called the Fed Funds Market, and the rate at which banks lend money to each other overnight is called the Fed Funds Rate.
The Federal Reserve has the job of regulating the Fed Funds Market (which effect M1, which in turn effects inflation), and can perform this function in two different ways. It can either have a set requirement of US Securities, which it wants to keep on hand, or it can have those securities sort of "float" in order to more fully control the Fed Funds Rate. That is why the anticipated rate is called the Fed Funds Target Rate.
When the Federal Open Market Committee adjusts the Fed Funds Target Rate, they are saying that they will adjust their portfolio (in the future) of US Treasury securities. This adjustment will effect the Fed Funds Market in such a way that the Fed Funds Target Rate and the Fed Funds Rate will come in line with each other.
The thing to keep in mind, is that the outside market (the entire world), instantly prices in any adjustment that the Federal Reserve makes, even though that adjustment takes time to complete.
Happy Trading
Keith Greff Jr
Jr Trade Analyst
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