How Does the Fed Keep Rates Near Its Target? A Primer

“……

The fed funds rate is the rate banks with excess reserves charge when they lend money to other banks overnight. It moves according to a traditional supply-demand path. When there are more institutions looking to borrow than lend, the rate goes up. When there are more lenders, it goes down. The Federal Reserve sets a target for this interest rate, and the Trading Desk at the Federal Reserve Bank of New York adds or drains funds to keep the rate near its target, which is now 5.25%.

……” –Phil Izzo

Ref:
http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html

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