Feds Freeze Funds Rate
Say that 10 times in a row. Not easy, huh? Neither is understanding exactly what it means when the Federal Reserve adjusts the Funds Rate, as they have just failed to do for the first time in two years. I know a lot of people who keep up with this but very few can really explain the inner workings of the Federal Reserve and the Funds Rate. How does the Funds Rate affect our economy? Where does it affect it? Who does it affect?
The Fed Funds Rate is a high frequency signal that is beamed out from secret installations to miniature receivers implanted in our brains by complicit pediatricians impelling us to consume to support the military-industrial complex.
That, of course, would be Oliver Stone's screen interpretation of the Fed but it's not that far off the mark albeit with less sinister overtones. In actuality, most of the US money supply exists outside of the control of the Federal Reserve. Thus, they rely heavily on the power of suggestion. Mostly, they operate in secret (though they are, sadly for you conspiracy theorists, subject to public disclosure laws that purely private institutions aren't). They do make a point of publicizing Federal Funds Rate moves because they wish to signal to the general public a loosening or tightening of the money supply. Bankers, stock brokers, mortgage brokers, purchasing agents, etc are supposed to get the message and act accordingly. The Fed does have a level of enforcement. The Funds Rate itself is the rate that banks (who are members of the Federal Reserve System) lend to each other. Actually, the Funds Rate is a target. The Federal Reserve achieves this target by what they call open market operations (the buying and selling of US treasury securities). Generally, banks go along with the rate increases and adjust the prime rate, or the interest rate charged to preferred customers. All other interest rates are generally pegged off it. Your equity line or credit card is sometimes listed as Prime + points.
You'll notice that I use a lot of evasive verbiage when talking about the Fed. Truly, there are so many other forces in the market that it's never clear what effects the Funds Rate actually has. Government fiscal policy, i.e., taxing and spending, has a much larger effect. I always explain the function of the Federal Reserve as being analogous to the fireman who steers the rear trailer of a ladder fire truck. Their job is to make the ride smoother, which they do with various rates of success. They were formed in 1913 to prevent the cyclical market panics that seemed to plague the economy. Shortly after in October of 1929, as if to prove the Robert Burn's line of the best laid plans of mice and men, the economy crashed like it has never crashed before.
For the econogineer, the most important aspect that we should understand, is that the engine of our economy is very large and powerful. It's inertia, that is, the resistance to the change in motion, is enormous. It's important to understand that changes are reflected only very slowly.
Actually, the recent rate moves by the Fed resembles the dynamic control variable response of a self-tuning controller system to a disturbance . And you thought the Fed was fuzzy. Suffice to say that this gives me hope that the Fed understands what is going on. The Funds Rate, assuming we don't have any more large disturbances like 9/11, should follow a first order oscillating decay, shown to the left (although the Fed Rate curve is the inverse of this, meaning we've just gone through the first trough).
Wikipedia, of course, has a good explanation of the Federal Funds Rate.
A good read for masochists is Greider's Secrets of the Temple. It's 800 pages and details mostly Volker's chairmanship during the late 70s, early 80s. Another good one, only slightly less masochistic, is the 700 page Creature from Jekyll Island, referring to the location of the 1913 meeting that created the Fed. Most people who have an informed opinion about the Fed tend to have extreme views; they either love it or hate it. In my opinion, the Fed serves a necessary function in an economy ruled with fiat money (cash not based on some real commodity). However, we should remember that they are a private institution that looks out for the overall health of their members, which are other banks.
The Fed Funds Rate is a high frequency signal that is beamed out from secret installations to miniature receivers implanted in our brains by complicit pediatricians impelling us to consume to support the military-industrial complex.
That, of course, would be Oliver Stone's screen interpretation of the Fed but it's not that far off the mark albeit with less sinister overtones. In actuality, most of the US money supply exists outside of the control of the Federal Reserve. Thus, they rely heavily on the power of suggestion. Mostly, they operate in secret (though they are, sadly for you conspiracy theorists, subject to public disclosure laws that purely private institutions aren't). They do make a point of publicizing Federal Funds Rate moves because they wish to signal to the general public a loosening or tightening of the money supply. Bankers, stock brokers, mortgage brokers, purchasing agents, etc are supposed to get the message and act accordingly. The Fed does have a level of enforcement. The Funds Rate itself is the rate that banks (who are members of the Federal Reserve System) lend to each other. Actually, the Funds Rate is a target. The Federal Reserve achieves this target by what they call open market operations (the buying and selling of US treasury securities). Generally, banks go along with the rate increases and adjust the prime rate, or the interest rate charged to preferred customers. All other interest rates are generally pegged off it. Your equity line or credit card is sometimes listed as Prime + points.
You'll notice that I use a lot of evasive verbiage when talking about the Fed. Truly, there are so many other forces in the market that it's never clear what effects the Funds Rate actually has. Government fiscal policy, i.e., taxing and spending, has a much larger effect. I always explain the function of the Federal Reserve as being analogous to the fireman who steers the rear trailer of a ladder fire truck. Their job is to make the ride smoother, which they do with various rates of success. They were formed in 1913 to prevent the cyclical market panics that seemed to plague the economy. Shortly after in October of 1929, as if to prove the Robert Burn's line of the best laid plans of mice and men, the economy crashed like it has never crashed before.
For the econogineer, the most important aspect that we should understand, is that the engine of our economy is very large and powerful. It's inertia, that is, the resistance to the change in motion, is enormous. It's important to understand that changes are reflected only very slowly.
Actually, the recent rate moves by the Fed resembles the dynamic control variable response of a self-tuning controller system to a disturbance . And you thought the Fed was fuzzy. Suffice to say that this gives me hope that the Fed understands what is going on. The Funds Rate, assuming we don't have any more large disturbances like 9/11, should follow a first order oscillating decay, shown to the left (although the Fed Rate curve is the inverse of this, meaning we've just gone through the first trough).
Wikipedia, of course, has a good explanation of the Federal Funds Rate.
A good read for masochists is Greider's Secrets of the Temple. It's 800 pages and details mostly Volker's chairmanship during the late 70s, early 80s. Another good one, only slightly less masochistic, is the 700 page Creature from Jekyll Island, referring to the location of the 1913 meeting that created the Fed. Most people who have an informed opinion about the Fed tend to have extreme views; they either love it or hate it. In my opinion, the Fed serves a necessary function in an economy ruled with fiat money (cash not based on some real commodity). However, we should remember that they are a private institution that looks out for the overall health of their members, which are other banks.
posted by Geoffrey Armone at
7:02 AM
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