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Fed Rate Announcement

Cullen, when fed announces its target rate, does it refer to overnight/govt bond rate ? If it is for overnight, do they also announce the target for short and long term govt bonds ?

The Fed Funds Rate is the overnight target rate. That is the rate they want reserves to be loaned at. Now, there’s a few ways reserves can be lent. One is the discount window (which is a precise rate) and the other is the overnight market between banks. Traditionally, banks would lend excess reserves at the best rate possible. But when the Fed implemented QE they flooded the market with excess reserves thereby putting downward pressure on rates. The Fed had to implement interest on reserves to push the rate back up to a target rate. So, the IOER rate is the de facto overnight rate now.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Taken from investopedia, discount window is central bank's reserve lending facility to private banks.  Do you mean the precise rate of discount window is because the fed can set its own rate directly ?

The discount window is where banks can borrow reserves directly from the Fed if necessary. This rate is usually the FFR plus a penalty rate, but it's always FFR + X%. This rate is a precise rate that the Fed sets in accordance with the FFR to help try to stabilize overnight loans.


"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

You said the "natural" overnight rate is zero. Does this "natural" rate always prevail in any economic circumstance ?

If everyone has too many reserves, and reserves do nothing if held in quantities beyond what the bank needs to satisfy capital requirements... then they lend the excess in a way that maximizes the overnight yield they would earn on it. If there are too many reserves in aggregate then that rate gets bid down to zero, which isn't the outcome the fed had in mind. To stop that the fed set an IOER, which serves as a floor on the yield since no bank would lend below that level (because they can earn IOER instead).

At least that's how I conceptualize it haha.

Fed controls FFR by a range of  these two rates IOER and ON RRP .  IOER is for ceiling control and is the rate for banks with reserves.  ON RRP is  for floor control and is the rate for depository  institutes without reserves.  Note that not all deposits institutes has reserves with FED.

Why FFR is in the range  ON RRP < FFR <  IOER?  Interbank lending rate FFR would not be above IOER  since those banks  can borrow money  with lower than IOER and higher than ON RRP from those depository institutes with ON RRP  rate.

In regard to interbank loan market, does it differ with wholesale deposit market ?

All depository institutions (commercial banks, savings institutions, credit unions, and foreign banking entities) are required to hold reserves(required reserves). Commercial banks can have excess reserves with Fed. I do not think that  savings institutions and credit unions can have excess reserves with Fed but they can put their money on Fed ON RRP facility with ON RRP  rate.  I am not sure about foreign banking entities.

Commercial banks can borrow money with negotiated rates at least from either (1) another commercial bank, (2) savings institutions and credit unions or (3) Fed via discount window in a competing fixed-rate market.