What is the Target Federal Funds Rate and why is it the primary tool of the FOMC?

Answer 1

The target Fed funds rate is the rate that the Fed is targetting for Fed funds to trade at. The Fed funds rate is the rate at which banks lend each other money. The reason they use it is to strengthen/weaken the economy. The Fed's goal is usually to keep the economy at the maximum sustainable growth rate without igniting inflation. Higher interest rates slow the economy, lower interest rates speed it up. If the economy is going too slow, lower rates. Going too fast, raise them.

Answer 2

The answer above has a website that makes no sense at all.

This is the one to look at. It also has an article on this page, that explains the Fed Funds rate in detail.

http://www.federalreserve.gov/fomc/fundsrate.htm

Answer 3

After placing aside reserves, banks lend their extra money to businesses and clientele. How freely the lend relies upon in part on how a lot it is going to value them to maintain the mandated reserve aspect. monetary company A would have extra reserve money, at the same time as monetary company B would fall short in reserves. Banks mechanically commerce those extra reserve money with one yet another. So, monetary company B would borrow from monetary company A on an in one day foundation contained in the Federal money market, the position such extra money are traded. If there's a extra reserve money contained in the gadget, then Federal money cost will fall, and banks will commence lending to businesses more beneficial freely. If there are various less money, then Federal money cost will upward push and banks will reduce monetary company on lending contained in the credit markets. If the Fed needs to pump funds into the gadget (to stimulate monetary activity), it buys Treasury securities contained in the open market. This action pumps more beneficial liquidity into the gadget because the Fed will pay funds for those securities. they want a "degree" to point how a lot funds to pump. therefore Federal money cost is the degree which the Fed makes use of to opt for a way a lot liquidity to characteristic into the gadget. If the effective Federal money cost remains above objective, which skill there's a lot less liquidity contained in the gadget and they upload funds into the gadget purchase paying for Treasuries. If it is going below objective, they take the more beneficial liquidity away by technique of decrease back by technique of promoting Treasuries. therefore, the Fed's open market operations are guided by technique of the "Federal money objective cost."