Considering FED repo rate and FED fund rate, what are differences, and how they are practically used nowadays?
For the purpose of modifying the Money supply (like QE, QT) rather than financing the Overnight deficit, what rate does the Fed uses?
The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight and is always higher than the repo rate because there is no collateral backing federal funds borrowing.
Both rates would affect the money supply ultimately.
The Fed would targets a federal funds rate range, which influences the rates that banks charge on loans. Also, the Fed can modify its overnight repo rate to affect financial institution lending and borrowing.
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The “Fed fund rate” is the rate banks charge each other for borrowing and lending overnight. Not the rate banks borrowllend from the fed.
The Fed (I belive via the individual members) uses repos and reverse repos to influence the fed funds rate.
https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements
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The Fed’s repo rate is the rate at which the Fed conducts overnight repo operations – i.e. overnight lend / borrow operations that are collateralized by US government fixed income securities.
The Fed fund rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.
The Fed conducts repo / reverse repo transactions to temporarily increase / decrease the supply of reserve balances in the banking system. The Fed is not directly involved in the Fed fund market – only the depository institutions actively lend / borrow in the Fed fund market. The Fed actively transacts in the repo market to increase/decrease the supply of reserve balances, which indirectly affects the Fed fund market. That is, the Fed monitors the Fed fund market (i.e. the Fed fund rate), but transacts in the repo market so as to keep the Fed fund market in line with monetary policy objectives.
Xavier
Feather Finance
p.s. I was a Short Term Interest Rate (STIR) market maker for 10 years…
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it means repo and fund market just can monitor the liquidity in short term or the velocity, not directly the Money supply or Monetary base in long run like Quantitative easing package right?