Fed discussed on KQED Radio Show

FED

Automatic TRANSCRIPT

You say interbank rates you're talking about the rate that banks kind of lend money to one another overnight yeah exactly and so that has historically been the fed's primary tool other things are changing a little bit of pretty wonky way right now but but I think that the key messages that they're the way they they affect the economy is really Viet interest rates and money supply and they also during the crisis your listeners might be aware I did quite as you know unconventional policy that has now become more usual for central banks to do which is that they bought and at held treasury securities in agency backed mortgage backed securities and the idea behind that was just to give the economy a little bit of extra boost because what they've traditionally done is really affected short term interest rates and they wanted to hate interest rates across what economists call the curve so sort of into a longer duration more cold wind this interest rate what exactly are we talking about we say the fed will cut this interest rate what is this right sure so the federal reserve has sort of two rates that is focused on right it's it's overnight rate but also the rate that it actually pays on reserves but the key is that when the federal reserve adjust interest rates it actually can trickle throughout the entire economy so if the federal serve cuts by a quarter that might mean a clear cut in mortgage rates similar size cut in credit card rates car loans business loans even amount of money that you get on your on your bank deposits so when so it has this ripple effect but in the direct sense if the federal reserve says we're going to cut this interest rate by a quarter of a percentage point what is that actually directly cutting the interest rate all right so that the two major things that they're that they're doing is they are a depository for other banks and so they actually pay an interest rate on the cash that they are holding for those banks that's the key one that they're playing with right now but at the same time there also cutting the the rate with which they're lending to other banks especially overnight what does it mean when a rate goes up or goes down typically speaking yet so when the federal reserve raises rates and so therefore loans are more expensive and savings is more valuable what we expect to see is people saving more and borrowing less right and during inflationary times that can be helpful because they can stop the economy from over heating when the fed cuts rates we expect the reverse we expect that people will borrow more and save less and less spend more throughout the economy so I just wanna make sure we're clear market the federal reserve raises rates than you know the people who give out home mortgages for car loans might raise their rates to what's their rationale for following the federal reserve why not go in the opposite direction well remember the federal reserve is the banks banks right and so theater financial system is Langton there's only limited arbitrage opportunities so if the federal service offering a more generous rate and other banks are are cutting there is there there's not gonna be any room for them to make money for them to have profits I'm sorry arbitrage yeah thanks so they're always our differences throughout the economy in various prices and and signals and when you see a major difference there sometimes there's Sir profit opportunities where you can close that gap through trades but that only works to a limited degree I can't really work if you're moving in the opposite direction of the major bank of the country Gino who runs the federal reserve who's in charge so the federal reserve is actually an independent body and so it's a little bit of a complicated system saddest walk walk you through sort of the basics but essentially there is a board of governors in Washington and the their seven members on the board of governors although they aren't all full right now that the president of the United States gets to nominate those those governors and and then Congress confirms them once they are in once they've gotten those jobs they can only be removed for costs which basically means malfeasance it can only be removed if they actually do something wrong so those guys in Washington and they're sort of you know death stalwarts of the committee is it what a good way to think of them they have a constant but on monetary policy and from the governor's you get your vice chair and your charm and who is the most important member in probably the most recognizable member of the fat currently that's J. pal then you've got twelve members who sit around the table at every interest rate decision but don't get to vote on everyone those guys are presidents from the regional banks and they are actually selected by representatives at the regional

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