I'm retarded. When discussing the interest rate in monetary

>>1874706
Federal funds rate. The rate of interest the CB pays banks for their deposits held at the CB. This represents a risk free return. The more interest the banks get paid by the CB, the less they want to lend because they can get free money by depositing it with the CB. This effectively reduces the money supply and makes it harder to get a loan. It also eventually changes risk tolerance of investors. If bond yields rise, implied yields from stocks (inverse P/E ratio) dont look as good. So stock prices should come down to get a better implied yield.

This is all distracting from the real problems though.

>>1874709
So it's the interest rate that the federal bank dishes out to private banks when loaning money?

>>1874710

Other way around.

It's the rate that commercial/private banks are charged on loans they take out with the CB.

>>1874712

Don't mind me, just failing at reading comprehension.

>>1874710

Yes

>>1874712
pretty sure its the rate the CENTRAL BANK loans out to private banks so if the CENTRAL BANK gives out $100 to Westpac, Westpac will be expected to pay back that $100 plus interest in the future. There for Westpac must loan out money to the public at a higher interest rate, correct??

pro tip: Westpac is a private bank in Australia

>>1874722

Yeah we're saying the exact same thing.

>>1874712
Oh ok. That's simple. Why doesn't anyone explain this shit this simply? Why didn't you? The fuck. I told you I'm retarded.

A private bank has a customer who wants a loan for a mortgage. The bank tells the federal bank (gov) "yo we need some cash for this guy's mortgage". Fed bank says ok, this is our interest rate you'll pay. Private bank pays interest rate, then passes that rate onto guy who needs loan (probably at 6%ish instead of the 1% the fed charged).

Is this more or less what's happening? Private banks "buy" money, and the interest rate is what the fed gov is charging for said money. This is a bastardization I know, but is it generally what's going on?

>>1874722
>>1874727
Oh. Are they (private bank) paying that loan back later or now? jc.

>>1874727
You are right, but banking isn't 100% like that. they get reserves through loans then through fractional reserve banking make money themselves. and only when reserves drop they have to take out more loanns.

also are you doing econ. uni?

It influences both the rates for commercial banks' overnight deposits with the central bank and the rates for commercial banks' loans from the central bank.

Low interest allows banks to get money cheaply from the Fed, which causes them to lower interest on peoples' deposits (why would banks pay you more for your money, when the Fed is giving out money for free?) and ask lower interest rates on loans (if money is essentially free your competitor bank could always undercut you, so all banks race to the bottom).
Low interest also means they don't get risk-free returns from parking money at the Fed, which encourages them to use their money otherwise, namely in giving out loans and for investing in the financial markets. This effect is especially prominent with negative rates, where the central bank *charges* the commercial banks for overnight deposits.

>>1874727
Thats called the discount window. Different from Federal funds rate.

Realize that the CB is just a collection of private banks.

Bank A needs to put 10 billion at the CB to meet the reserve requirement. Bank A has plenty of money and meets the requirement. Bank B is 2B short of meeting the reserve requirement. In a normal world the CB sets the FFR at 4%. So Bank A can earn 4% on their money by putting an extra 2B at the CB and helping Bank B meet the reserve requirement. Since they can get 4% risk free, they will tend to do that.

>>1874748
Oh Bank B pays Bank A interest at the Federal funds rate in the example.

If Bank B needs to borrow from the Discount Window, the rate is about 1% more.

>>1874743
So with negative rates a bank gets paid for being insolvent?

>>1874764
Not if it's secured. If a bank borrows on the interbank market overnight, they'll give some liquid securities (eg gov bonds) as collateral. So negative libor, for example, means that banks are paying for the privilege of holding the securities rather than cash.

>>1874706
Quick rundown:

Federal Reserve:
Monetary policy goals of the Federal Reserve:
>Control the amount of money economy
>Control the level and course of interest rates

Made up of 12 District Banks and 7 board members.

The Federal Reserve serves as an agent of the treasury and is responsible for auctioning bonds.

Actions that the Fed can take to achieve monetary policy goals:
>Cut or raise the discount rate
>Change the reserve requirements
>Can undertake outright transactions in Treasury and Agency securities at market prices with security dealers and accounts maintained at the New York Fed
>Can enter into repos for different terms to maturity

Reserve requirement
>Amount of reserves that depository institutions must place at the Fed
>Fed funds, repos, and foreign deposits do not require any reserves
>If the reserve requirement goes up then the money supply goes down, vice versa

Federal funds market
>Depository institutions with excess reserve funds at the Fed are able to loan funds to banks lacking reserve funds - Unsecured lending between depository institutions
>Federal funds rate is what lenders charge borrowers
>The federal funds rate is positively correlated to demand for reserves

Open market operations
>Also known as the “Fed’s discount window”
>Fed provides credit when there is a shortage “the lender of last resort”
>FOMC directs the New York Fed trading desk to conduct secondary market transactions
>The FED can only conduct operations in markets where Treasury and Agency securities are already outstanding
>The FED uses the secondary markets to change its holdings of treasuries
>The FED can use both outright transactions and temporary transactions to inject or drain reserves

Matched sale-purchase transaction
>Sell bills for immediate delivery
>Simultaneously by back bills for delivery within 7 days
>This is seen as two separate transactions
>MSPs allow the FED to “absorb” excess reserves by limiting banks ability to loan

>>1874706
The rate at which banks lend to each other (to meet their reserve requirements) is affected by the fiscal balance of the government in the current year. Usually it's in deficit, which means more reserves in the system, so demand for reserves would be lower and it would drive that rate closer to zero. This is why the government sells bonds and/or pays interest on reserves (these have exactly the same effect); to hold the overnight rate up to some level according to its policy.

Monetary policy doesn't affect the "money supply" as you might have been told because private bank credit creation is not limited by their reserves, but by capital and the creditworthiness of their customers. A bank can always borrow reserves from other banks or the government if needed to meet their obligations.

So is the rate at the discount window basically the same the FFR? In what circumstances do they one as opposed to the other?