79

You can lend at any rate you like. Finding a borrower is a different matter, as is ensuring that the borrower pays it back. Few banks will borrow from you at the Fed rate. Currently, rates on savings accounts are less than 0.5% and FFD target is about 2.5%. Plenty of customers still use the savings accounts in spite of this. These customers are your ...


39

borrow money from the Central Bank Wrong premise. They cannot borrow as much as they want and they cannot borrow without collateral i.e. government debt instruments they hold or any other instrument with value. And banks don’t have unlimited collateral to borrow against. Secondly central banks aren’t in the business of lending unlimited money. The more ...


32

They don't actually need to. They accept deposits for historical reasons and because they make money doing so, but there's nothing key to their business that requires them to do so. Here's a decent summary, but I'll explain in great detail below. By making loans, banks create money. This is what we mean when we say the monetary supply is endogenous. (At ...


30

Buying Treasury Bills is loaning to the U.S. government. The 4 week Treasury Bill with an issue date of 8/27 got a 2.098% investment rate. The 13 week Treasury Bill with an issue date of 8/29 got a 1.992% investment rate. Individuals can buy Treasury Bills, without any fees, through a Treasury Direct account .


24

Banks cannot just borrow from the Federal Reserve and use that money to make loans. The first thing you need to understand is how fractional reserve banking works. The banks can make loans with money that their customers have deposited in their accounts. The interest and fees from those loans go to pay the salaries of those working at the banks with leftover ...


13

Coins are assets because its the actual money. Notes are liabilities because the Federal Reserve is obligated to pay money on these notes. Basically a Federal Reserve $1 note in your pocket is an "I OWE YOU" from the Federal Reserve, not money. While a $1 Susan B is not a "I OWE YOU" but the actual $1 worth of currency. Coins are minted by the US Government,...


11

Wholesale vs retail For pretty much everything, including loans, the wholesale price is different from the retail price. It is unreasonable to expect the same price when buying a can of Coca Cola as the price you could get when buying a truckload of the exact same cans. It is unreasonable to expect the same price when buying a pound of grain as the price ...


7

Collateral requirement Borrowing money from the Federal Reserve (or other central banks) requires full collateral, generally in terms of treasury bonds. In that sense it is only a source of liquidity - getting short term money by pledging guaranteed future cash flows, not random commercial loans. To get a dollar from FR today requires freezing a dollar that ...


7

The interest rate controlled by The Fed (AKA the Federal Funds Rate) is for the rate of interest earned by banks when they loan out their excess cash reserves to each other. The Federal Reserve, (The Fed), is the reserve for all of the big commercial banks in the US. The banks are obligated to keep a certain amount in the Reserve to ensure they can ...


7

I'm pretty sure it's just a policy that the Fed seems to follow. I know of no mechanical reason why they couldn't use more precise increments, but possibly for simplicity (or tradition) they choose to use more granular rates than other countries seem to. Keep in mind that influencing interest rates is an inexact science. The Fed will set rates at a certain ...


6

Quantitative easing is a general term that just refers to when a central bank decides to purchase financial assets from non-governmental institutions, as opposed to the usual policy of buying and selling government debt securities. Quantitative easing doesn't impose any legal framework on central banks that forbids them from buying municipal bonds; it's just ...


6

They don't need to accept deposits from normal persons, but that's how they make lots of money. Banks make money off the fees they charge retailers when those folks swipe their debit cards at the retailer. It's their bread and butter. In order to facilitate you accruing swipe fees for them, they need to allow you to make deposits, on which they can charge ...


6

According to A Model for the Federal Funds Rate Target at page 13 changes as small as 6.25 basis points were sometimes observed prior to 1990 Similarly, according to The Relationship Between the Federal Funds Rate and the Fed's Federal Funds Rate Target: Is It Open Market or Open Mouth Operations? at page 4: In late 1989 the Fed began the practice ...


6

As Peteris pointed out, small sums of money aren't worth paying Fed interest on. And, as Money Ann pointed out, there are a lot of people willing to lend similar sums for less. These loans are what are called bank accounts. The reason private persons are willing to undercut the Fed rates by that much is that the conditions on the loans are heavily in the ...


5

The bond funds should tell you their duration. My 401(k) has similar choices, and right now, I'm at the short maturity, i.e. under 1 year. The current return is awful, but better than the drop the longer term funds will experience as rates come back up. Not quite mathematically correct, but close enough, "duration" gives you the time-weighted average ...


5

I see that you're invested in a couple bond funds. You do not want to be invested in bonds when the Fed raises rates. When rates climb, the value of bond investments decline, and vice-versa. So that means you should sell bonds before a rate hike, and buy them before a rate drop.


5

Federal Funds Rate The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The federal funds rate is generally only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other. The federal funds rate is one of the most ...


5

My answer is specific to the US because you mentioned the Federal Reserve, but a similar system is in place in most countries. Do interest rates increase based on what the market is doing, or do they solely increase based on what the Federal Reserve sets them at? There are actually two rates in question here; the Wikipedia article on the federal funds ...


5

The stock market in general likes monetary easing. With lower interest rates and easy cheap money freely available, companies can borrow at reduced cost thus improving profits. As profits increase share prices generally follow. So as John Benson said Quantitative Easing usually has a positive effect on stocks. The recent negativity in the stock markets was ...


4

Can you isolate the market impact to just the Fed's quantitative easing? Can you rule out the future economic predictions of low growth and that there are reasons why the Fed has kept rates low and is trying its best to stimulate the economy? Just something to consider here. The key is to understand what is the greater picture here as well as the question ...


4

The fundamental value of a treasury bond is determined by the coupon rate it pays and the time remaining until it matures. The primary determining factor in the price available in the open market for a treasury is the interest rate environment. If the market expects rates to increase in the future, the market value of bonds will fall to compensate for this....


4

While it is true that if the Federal reserve bank makes a change in their rate there is not an immediate change in the other rates that impact consumers; there is some linkage between the federal rate, and the costs of banks and other lenders regarding borrowing money. Of course the cost of borrowing money does impact the costs for businesses looking to ...


4

I'll break what you wrote into two questions: A) Why do banks base loan rates on a benchmark provided by the fed? Banks like to decompose your interest rate into two components: The prevailing interest rate for an almost risk-free borrower (the time-value of money) The amount they will charge over that to you based on your riskiness and their required ...


4

From what I have read, the Federal Reserve sets the "key rate", which is the rate at which banks can borrow money from the Reserve. This is called the discount rate, but it is mostly irrelevant, as banks hardly ever borrow from the Federal Reserve system. It is not usually considered to be the key rate. The more important number that the Fed sets is the ...


4

If you are asking if you can lend money to the banks, I'm not sure how you would manage that. Maybe it surpasses my level of expertise, but it seems like an overly complicated way to collect ~2.25% interest. Many online banks are actually beating the Fed Funds rate right now (both Wealthfront and Betterment are over 2.3%). They do this to attract clients ...


4

No, for a few reasons. Banks negotiate the rates amongst themselves, it is not determined by the Fed. The Fed's FOMC sets a target for that rate, and the FRBNY OMO desk tries to arrange to meet that target by adding or removing money supply. But it is a target, not a determination. The real rate (called "effective rate", about 2.12% as of last night) is ...


4

The balance sheet slightly increased recently, but the general trend has been toward smaller. You can see the balance sheet (and other great data) on the website for the St. Louis Federal Reserve: https://fred.stlouisfed.org/series/WALCL Edit: Yes, the fed receives the principal payments. Otherwise, the Fed would have large losses on the purchases. The ...


4

Short Answer: The FDIC exists specifically so that there are not MASS runs on the banks. No need to worry as long as you're under the limit(s) in your account(s). Make sure your account is insured: https://www.fdic.gov/deposit/deposits/faq.html They say that the "FDIC is backed by the full faith and credit of the US Government." And they really do mean ...


3

The Fed rate is so important because it sets a cost on lending institutions (banks, credit unions). It is the rate of interest that a bank gets by loaning its cash overnight to the Fed. Presumably, the Fed then loans the cash to other institutions around the world. The banks loan money to individuals at a higher rate. Savers get a rate between what the Fed ...


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