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Key Interest rates

U.S. Key Interest Rates. The rates to watch are: Federal (Fed) funds rate sets the tone for money market rates.
Discount rate usually sets the floor for the Fed funds
rate.
The Fed funds and discount rates are the two key interest
rates. Deoositorv institutions hold non-interest bearine reserve accounts at the Fed to meet reserve requirements and handle interbank transactions. Deposits above the minimum required are traded overnight and the Fed funds rate is what banks charge each other for these overnight loans. The Fed has an objective for the funds rate which is never formallv published. However.
so-called Fed watchers can usually tell what the target is by observing where the funds rate trades in conjunction with the Fed's money market operations.
The first time the Fed announced a rise in interest rates at
The time it took place was on February 4, 1994 when it issued a statement saving that the Federal Open Market Committee had decided to increase slightly the degree of pressure on reserve positions. However, a series of rate rises in early 1994 were accompanied by formal Fed statements which the markets believe were designed to make its intentions clear. What is not clear is whether this will become the standard method by which rate changes are signalled. Traditionally. Fed watchers had to wait until the release of the minutes of the regular Federal Open Market Committee meetings, which are published six weeks after wards, for confirmation of any perceived change in monetary policy.
All institutions with reservable deposits can borrow at the Discount rate from the Fed's discount window for short term adjustment purposes and limited other uses. The Fed funds rate is usually above the discount rate. When the funds rate is at, or be low, the discount rate there is little use of the discount window by healthy banks which have access to the funds market.
(There is no U.S. equivalent of the lombard rate which other central banks use to penalise institutions requiring emergency funds. However, there are circumstances when the Fed may charge a market rate above the basic discount rate. For example, borrowing under the seasonal programme is at a market rate average of Fed funds and certificates of deposit (CDs). Extended credit borrowing by banks in difficulty can also be at an above market rate.)
Open market ooerations are conducted with a eroup of primary dealers in government securities (about 40) which are mainly subsidiaries of bank holding companies and securities houses. Eligible paper includes Treasury bills, notes, bonds and, for repos, government agency securities.
Vocabulary
to set the tone
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non-interest
bearing -
: target ,

in conjunction - , ...
ai to be designed
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minutes
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perceived

for adjustment purposes

to have ' access - ...
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to'penalise -
to change a rate -
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