Unformatted text preview: ee (FOMC) meets every 6 weeks to
debate and set these interest rates.
But…the FED does not set the Federal Funds rate or prime rate. Each is established by
the interaction of lenders and borrowers. The FED can change the supply of excess reserves in
the banking system and so it can obtain the market rates it wants.
• To increase the Federal Funds rate, the FED sells bonds, excess reserves are reduced,
lessening the amount available for overnight loans. This raises the Federal Funds Rate. The
lower excess reserves also means less borrowing and less growth in demand deposits. Other
rates (prime for example) rise as well.
• To decrease the Federal Funds rate, the FED buys bonds, excess reserves are increased,
increasing the amount available for overnight loans. This lowers the Federal Funds Rate. The
higher excess reserves may mean more borrowing and growth in demand deposits. Other rates
fall as well. 76...
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- Fall '11
- Monetary Policy, Federal Reserve System, Fed, federal funds rate, excess reserves