when the fed wants to lower the federal funds rate it

With short-term debt, this happens pretty fast. Debt eventually matures: The principal is paid off, and the individual Treasury bill ceases to be a tradeable financial instrument. Even if there was enough short-term debt, the Fed doesn't have any. 'In other words,' Phillips wrote, 'there’s nowhere near enough to soak up the amount of reserves the Fed has created.' Meanwhile, there's only $1.4 trillion in short-term U.S. But, as Matt Phillips laid out in an excellent piece in Quartz in September, the banks' reserve accounts exploded from $10.1 billion in June 2008 to around $2.5 or $2.6 trillion today, thanks to the Fed's efforts to combat the Great Recession. debt from the banks, create new money and spit it into the reserve system.įor this tool to work, there needs to be a certain balance between the amount of money in the reserve system and the amount of outstanding short-term U.S. Conversely, if the Fed wants to lower the federal funds rate, it can buy U.S. The interest rate is just the price of borrowing the reserves, so if the Fed sucks up the reserves, that lowers supply and raises the price.

That interest rate is the federal funds rate, and it exerts a massive rippling influence on all other interest rates throughout the economy. The banks trade a certain amount of these reserves back and forth all the time, and they pay or receive interest from one another on those exchanges. The nation's banks are required by law to hold reserves of money, providing a cushion for the banks' day-to-day operations. The first and most traditional is the federal funds rate. This gets us to the specific tools the Fed uses to inject money or suck it out. Yesterday's announcement was the Fed's declaration that it intends to do some of the latter. To slow down inflation, it sucks money out of the economy and destroys it, which raises interest rates. To boost job creation, the Fed creates money and spits it out into the economy, which lowers interest rates. Its dual mandate, to keep inflation low and stable while maximizing employment, ostensibly guides how much creating versus destroying it does, and when. There's a possibility the Fed can't raise rates even though it wants to.Īt the most basic level, the Fed's job is to create and destroy money. As it turns out, the 2008 collapse altered the Fed's relationship with the economy so much that we've entered uncharted territory.

When the fed wants to lower the federal funds rate it