General Question

luigirovatti's avatar

Is the following information about trading accurate?

Asked by luigirovatti (2826points) April 12th, 2022
1 response
“Great Question” (0points)

There are actually two interest rates that are directly affected by the Fed, Lee. The Federal Funds Rate is the interest rate banks charge other banks who borrow funds to meet reserve requirements. If that rate goes up or down, interest rates on bank CDs, T-bills, mortgages and commercial paper will soon follow. The Fed sets the target Federal Funds Rate at the FOME meetings. Then the New York Federal Reserve Bank, through its Domestic Trading Desk, buys or sells government securities, which in turn restricts or expands the supply of money available to banks to ensure that that interest rate is maintained. We call that adding or subtracting liquidity. The second interest rate which can be affected by the Fed is the Discount Rate, the rate charged by the Fed to banks for loans by the Fed. However, the Discount Rate is tied to loans for what amounts to emergency purposes; thus, it’s known as the ‘window of last resort.” Banks who frequent that window too often will come under increased regulatory scrutiny, since it’s seen as a sign of weakness in banking circles. For that reason, most banks will borrow money from other banks at the slightly higher Federal Funds Rate, since there is no stigma attached to that channel of credit.

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zenvelo's avatar

The information is accurate, however the title of your question is not.

Discussion of the Fed Funds rate and the Discount window do not have anything to do with trading except in the most tenuous way. Actions between banks and the Fed are not trading decisions but rather decisions about managing reserves.

Trading has to do with buying and selling different instruments between brokers.

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