Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
extreme sensitivity to current economic conditions. These serve as indicators - litmus paper, if you will - for the direction of all others. They are:
Federal Funds Rate - This is also known as the funds rate or the overnight lending rate. Every day banks deal with money entering and leaving their systems, and therefore their reserves are in a constant of state of flux. At the end of the day some banks end up with reserves in excess of their mandated requirements and some fall short of their requirements and must add to their reserves to make up the difference. In most cases a bank that falls short of its reserve requirement on a particular day needs to borrow reserves for a very short period of time such as overnight. By the next day the bank can take corrective action to remedy its reserve shortage (or the situation may remedy itself) and return the borrowed reserves to their originators with interest. Those banks with excess reserves at the end of the day would like to loan out the excess reserves since reserves that sit idle do not collect interest. At this point banks with reserve shortages can borrow reserves from those with excess reserves at the going interest rate, the Federal Funds Rate. Since the funds rate is determined by supply and demand of reserves, the Fed has an enormous and immediate influence on it. Depending on the economic conditions, the Fed may decide to raise, lower, or leave alone the funds rate. The Fed's actions with regards to the funds rate is perhaps the most heavily watched event, as it is signals the Fed's Monetary Policy stance and acts as a guide for other interest rates to follow.
Treasury Bill Rate - Treasury Bills (T-Bills) are short-term (3, 6, 12- month) interest-bearing debt securities issued by the government and auctioned off by the federal reserve banks. The interest (or yield, which we will cover later) associated with these securities form the basis of short-term interest rates. T-Bills are most frequently used in Federal Reserve open market operations. …
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