Federal Funds Rate Defined.

"DEFINITION of '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 influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which in turn have a bearing on key aspects of the broad economy including employment, growth and inflation. The Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body, telegraphs its desired target for the federal funds rate through open market operations. Also known as the “fed funds rate".


INVESTOPEDIA EXPLAINS'Federal Funds Rate'
The higher the federal funds rate, the more expensive it is to borrow money. Since it is only applicable to very creditworthy institutions for extremely short-term (overnight) loans, the federal funds rate can be viewed as the base rate that determines the level of all other interest rates in the U.S. economy.

Banks and other depository institutions maintain accounts at the Federal Reserve to make payments for themselves or on behalf of their customers. The end-of-the-day balances in these accounts are used to meet the reserve requirements mandated by the Federal Reserve. If a depository institution expects to have a larger end-of-day balance than it needs, it will lend the excess amount to an institution that expects to have a shortfall in its own balance. The federal funds rate thus represents the interest rate charged by the lending institution.

The target for the federal funds rate – which as noted earlier is set by the FOMC – has varied widely over the years in response to prevailing economic conditions. While it was as high as 20% in the inflationary early 1980s, the rate has declined steadily since then. The FOMC has maintained the target range for the federal funds rate at a record low of 0% to 0.25%, from December 2008 onward, to combat the Great Recession of 2008-09 and stimulate the U.S. economy."



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Open Market Operations Defined.

"DEFINITION of 'Open Market Operations - OMO'
The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.


INVESTOPEDIA EXPLAINS'Open Market Operations - OMO'
Open market operations are the principal tools of monetary policy. (The discount rate and reserve requirements are also used.) The U.S. Federal Reserve's goal in using this technique is to adjust the federal funds rate - the rate at which banks borrow reserves from each other."



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Reserve Requirement Defined.

"Reserve requirement

The reserve requirement (also known as the cash reserve ratio) is the minimum amount of money that banks must hold in reserve, usually given as a percentage of customer deposits. The cash is normally stored in a vault at the bank or with a central bank and cannot be invested or loaned out to businesses or individuals. The requirement is set by each country's central bank and raising or lowering the reserve requirement will subsequently influence the money supply in the economy.



How does adjusting the cash reserve ratio affect money supply?

If the reserve requirement is raised, banks will have less money to loan out and this effectively reduces the amount of capital in the economy, therefore lowering the money supply. It will mean less money for investment and spending, and would stunt the growth of the economy. It would also mean that banks earn less interest and could see their share prices fall.

Lowering the reserve requirement will have the opposite effect; banks will be able to lend more which would increase money supply and stimulate economic growth.



How can adjusting the reserve requirement affect currency value?

Raising reserve requirements can cause an increase in currency value because when banks are restricted in the amount that they can lend out, they may charge borrowers a higher rate of interest. This is bad news for borrowers, but good news for savers who can benefit from a higher rate of return on their savings. If more capital enters the economy to benefit from those higher interest rates, the value of the currency is likely to increase.

The opposite is true if reserve requirements are lowered. Banks will be able to lend more and so may offer lower interest rates, which can in turn cause the value of a currency to decrease."

( http://en.tradimo.com/tradipedia/reserve-requirement_97012/ )

Federal Discount Rate Defined.

"DEFINITION of 'Federal Discount Rate'
The interest rate set by the Federal Reserve that is offered to eligible commercial banks or other depository institutions in an attempt to reduce liquidity problems and the pressures of reserve requirements. The discount rate allows the federal reserve to control the supply of money and is used to assure stability in the financial markets.


INVESTOPEDIA EXPLAINS'Federal Discount Rate'
A decrease in the discount rate makes it cheaper for commercial banks to borrow money, which results in an increase in the supply of money in the economy. Conversely, a raised discount rate will make it more expensive for the banks to borrow, and would thereby decrease the money supply. Funds borrowed from the fed are processed through the discount window and the rate is reviewed every 14 days."



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What is Quantitative Easing?

"DEFINITION of 'Quantitative Easing'
An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.


INVESTOPEDIA EXPLAINS'Quantitative Easing'
Typically, central banks target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses."



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