10 Responses to “Banking 15: More on the Fed Funds Rate”

1. 

   Pinna74 February 16th, 2009 at 3:25 am

   Very Very interesting. Congratulations and Thank You. On the European Central Bank web site there are some very interesting videos showing that the ECB directly lends money at minimum discount rate (they call it beat rate)
   to commercial banks when they need it. Is it just a different way on how a central bank can work, or they just don’t want to get too technical?
   Many thanks.

2. 

   HamiDjoukou February 16th, 2009 at 3:25 am

   So, the government / CB has two ways of doing things

   a) When CB needs wealth (to lower interest rates) it can print notes/money.
   b) When CB needs wealth (to finance new infrastructure or war) it can issue treasuries.

   Is the CB free to choose, do they have any rules to follow?

   By doing a or b resulting in:
   a) Lower short term interest rates – when no wealth/GDP is generated also inflation.
   b) Higher interest rates no inflation, probably deflation

   Is this correct?

3. 

   HamiDjoukou February 16th, 2009 at 3:25 am

   In your video Banking 12: Treasuries [10:30] at that point, you didnt explain the reverse process, rising interest rates as a result of issuing the treasuries.

   But when governments needs money, almost always theres a crisis, and at that time it is not in the interest of the government / central bank to have hi interest rates, isnt it contradicting?

4. 

   HamiDjoukou February 16th, 2009 at 3:25 am

   How does the system functions when there is no national /federal debt, then the central bank probably hasnt issued any treasuries, so what is it going to buy back (inject money) in order to lower interest rates and improve liquidity?

   What are the rules, I mean, can the CB only buy treasury notes & bonds, or do they also use short term bills? Can they also buy stocks or commodities?

5. 

   HamiDjoukou February 16th, 2009 at 3:25 am

   Hi Sal, first of all my complements for your videos, great job, I like them very much.

   I have some questions though, hope you dont mind.

   By selling or buying treasuries doesn’t the central bank drive up or down the price of the treasuries, especially in case liquidity in the treasury market goes down?

6. 

   woodenjaw February 16th, 2009 at 3:25 am

   Same here.

7. 

   armpitpuncher February 16th, 2009 at 3:25 am

   I love you Sal, you make me smart.

8. 

   mborsuk February 16th, 2009 at 3:25 am

   Why does uncles deposit go to na asset site? Hhoudn’t it go to liabilities site?

9. 

   HumanistDad February 16th, 2009 at 3:25 am

   To increase the Fed Funds rate, the Fed issues Treasury bills and takes bank notes (cash, money, etc) in exchange. Where does the money go? Is it essentially ‘out’ of the economy?

10. 

    ThatIsNotDeadWhich February 16th, 2009 at 3:25 am

    The CB doesn’t do Treasuries. The Treasury does. That’s why you can get absurd situations like the Bank of England printing money in order to increase liquidity, and the Chancellor issuing gilts in order to soak up the excess liquidity (because the Chancellor and the BoE disagree on the relative need for liquidity vs. the risk of inflation).