How Interest Rates Are Set: The Fed's New Tools Explained
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- Опубликовано: 16 сен 2015
- The Federal Reserve has kept interest rates at near zero since the 2008 financial crisis. To raise them, it has come up with a new set of tools. A WSJ explainer.
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i left more confused than when i came
Essentially it's a scam.
totally
same
Don't worry...so did the Fed.
ignorance is bliss. this knowledge will show you how the system is rigged against you.
I feel like most metaphors people come up with confuse me more than they have to
lol, i was thinking the same thing XD
they dont tell you the mechanism they use to set the reverse repo rate ..
they sell govt bonds ( reverse of repurchase ) ..to banks
with half truths they confuse the public ..plausible deniability ..they can always say they didnt lie ..they compartmentalised the mechanisms
is a repo, so technically fed doesnt sell the treasuries per se. more like a collateralized loan
Maybe that's the point.
I agree. I honestly don't understand why people can't just explain the process, and define the terms within, and maybe just give a little metaphor at the end to further reinforce it, rather than just saying screw it all and only going with the metaphor.
couldn’t have explained it worse! :)
Because they don't know what they are talking about.
The difference between interest rates and inflation is that one only has a currency excomponent and 2 time excomponents. And the comparisons between the two time excomponents. The other adds a labor excomponent.
Intrest rates are credit cards. No labor excomponent. It's all deals with a currency. So it's interest rates.
Where as in inflation, the excomponent "labor" is added. For example; as in a mortgage. A labor excomponent is added. So the difference between the two time excomponents is inflation (not interest rates).
Because a house takes labor to build. So, a labor excomponent is added.
@@noel7777noel You don't make any sense.
Yes, one of the worst explanations.
Yes, one of the worst explanations.
I think there are other ways to explain this process in a simpler way.
Please create video about it and share here :*
@@themindisgod7032 hahahahah
I've got a bad feeling about this
You always have a bad feeling about something private jenkins!
lol can't help but laugh. when I see bills going out and pennies coming in, that gives me a bad feeling too
I'm not the highest grade of weed in the dispensary, but that still confused the shit out of me...... smh
lol, awesome
It's not you; the video is awful.
Super low interest rates are a disaster for younger generations.
They just makes the capital cost of everything higher, effective repayments lower and length to pay off longer.
But the risks are sky high in that one day rates will return to normal and home prices will crash along with stockmarkets and valuations of almost everything.
Playboysmurf1 im hoping for that, in a lesser extent. home prices and the stock market are far too hot
That’s exactly where we are today! Real estate/equities etc are in a massive bubble that’s set to collapse as soon as interest rates rise even a little bit. Not to mention all the zombie corporations
@@sammearle 10 years later..... I agree lol
Yeah, there should be limits on how much they can raise rates each year imo
Why would low interest rates cause higher capital costs?
Lesson - if you save money, the Fed steals from you through inflation at will.
that's a scam if I've ever seen one
Actually, info presented in this video is misleading and outright wrong for some parts. Only some parts are correct here.
- For once, it doesn't have Discount Rate
- It misleads you to think that big banks and home loan banks are 2 classes. They are not. Feds do distinguish between different sizes of banks but not this way
- IOER is depicted as the upper bound. It is plain wrong. It also doesn't distinguish between IOER and interest on (required) reserves
I understand it was uploaded back in 2015 but WSJ NEEDs to update it.
In case anybody reads this comment and believes it, this person is wrong. The new system for setting interest rates is incredibly complex because it was designed out of necessity during the 08 crisis. This video is confusing, but it is not wrong at all.
-The discount rate is no longer used since banks refused to use them (it makes banks look desperate and thus drove away business).
- Banks and home-loan banks ARE different. Home loan banks are those established with the sole purpose of making loans. Non home-loan banks can offer mortgages too, but they do other things that the home loan-banks cant do. (Think Fannie Mae, Freddie Mac, and others).
- Interest on Excess Reserves IS the upper bound. Zaiks is reading from outdated textbooks. Also the IOER and the rate on required reserves are the same... so, yeah.
@@peterkramme You are correct. I'm not afraid to admit.
Being said that, discount rate is STILL the upper bound but in the context this video didn't explain. In pre-2008, feds fund rate is bounded between discount rate and IOER. Aftermath, after floor-with-subfloor was introduced, it is bounded (as in this video context) between IOER as upper bound and RRR as lower bound.
I'll comment a better understanding.
@@zaiks0105 Thanks for the response. I realized looking into it more that the discount rate is still available today as well. In practice though, the discount rate is rarely used. By the way, your original comment would have been accurate any time before the recession and is what is still, unfortunately, taught today. Almost all undergraduate econ students leave college with an understanding of monitary policy and money markets that is wrong because professors and textbooks refuse to update their lessons. Even Ivy League students leave college thinking that the IOER is the interest rate floor. It's infuriating
If you want I am happy to link some materials showing other econ theories still in textbooks that are wrong
@@peterkramme From what I gathered from listening to dr.steven hail is when banks find themselves short on reserves at the end of the day they can should borrow the reserves from another bank (at the cost of fed funds rate). However thats not always possible so the banks can borrow reserves from the fed discount window, but as you said banks prefer not to do this because it can be seen financial instability.
@@zaiks0105 The fed funds rate at times can be higher than the discount rate when the banking system is a short on reserves, when banks are short on reserves they will try to borrow from each other and this will bid up the fed fund rate. However today because of QE banks have plenty of reserves and this pushes the fed funds rate down as its unlikely at this moment the banks dont need to borrow reserves as they have plenty in the system.
Where does the money come from to pay the interest on the principle when only the principle is printed ? The interest is not printed, it's a MASSIVE SCAM just like taxation is theft.
😂 No.
Sounds like the perfect scam lol.
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@@sandimarielavati2354 shut up
Today it's not about return ON capital. Today it is about return OF capital.
what does that mean?
The federal reserve lowers interests rates for a couple of years so everyone can get loans with 0% apr, then they increase the interest rates which also in turn makes people stop taking out loans, the federal reserve collects all the money from the loans and lowers the money supply which increases the value of the dollar but the loans are still the same. Then causes a financial crisis by making people default on loans they cant afford because the dollar is worth more
Why would they do that ?
@@brianbuckley9682 to take all your assets
@@chrisdt95 if the fed was actually taking that much money out of circulation we would see very obvious cycles of deflation, which doesn't happen.
To the best of my knowledge, the traditional complaint has been that they increase the money supply by printing money out of thin air and causing inflation, rather than decreasing it.
Wages/salary generally doesn't deflate though. Why would that affect someone's ability to pay loans back?
why does home loan accept lower interest rates? why don't they just set the interest rate to maximum below IOER?
Becuz the "Fed" which is a private bank goes off of how the economy is doing and sets the bench mark from there..
I believe the Fed Funds Rate, which is the rate you are referring to, is a natural result of the supply and demand for reserves in the banking system. In this scenario, supply is likely large enough that Big Bank has enough negotiating power to find a better rate elsewhere. Yes, they could borrow just below the IOER and earn a profit, but they could also find a different bank to supply them funds at a lower price. Similarly, Home Loan cannot find another borrower offering a higher rate. When the Fed raises the RRP, both Home Loan and Big Bank know there is another borrower in the market offering a higher, virtually risk-free rate. This gives negotiating power to Home Loan. In effect, it is equivalent to raising the demand for reserves, which brings the market rate to a new, higher equilibrium. Another way for the Fed to achieve this, presumably, is to decrease the supply of reserves in the banking system, by selling government bonds.
this system looks to me like an engine with a stupid, unstable design.
an engine that's been upgraded with a quick-and-dirty solutions over the time, just to keep it running (= prevent operation-stop).
The best. Comparison. Ever.
this video was interesting but you lost me when you introduced the fourth building. why would the home loan building need to be coaxed into lending at a higher interest rate? that's what anyone would obviously want to do.
Just abolished the Fed so we don't have to deal with this mess
and then what would control the markets when it collapses
Nothing, that’s the point. The worst financial collapses in history have been exacerbated by the fed, increased government spending and regulation.
"New economic era" Brace for impact..
Meanwhile, those who want to earn money in their savings account get the shaft due to Fed policy.
Hi is it true that Muslims who don't believe in interest rates in there country
Anyone??
I am a little bit confused- if fed increases the interest rate to slow down the pace of econimic growth as well as the increasing inflation rate, at the same time it will attract foreign investor to invest in the same currency which in turn increase the supply of money,.. Please help me understand this..if we speak about interest rate, which interest rate are we speak about??
Hey Rashid. When we speak about "interest rates" without any other kind of qualifier, we usually mean the Fed Funds rate. There is indeed an international flow of funds that can upset the equilibrium described in the video here, but I wouldn't worry about that until you've mastered the basics of monetary policy.
I think it's easiest to think of inflation as the supply of money in the system. As the interest rate goes up, it will drive down the rate of inflation, because money that would otherwise be used to make loans or purchase capital is instead sitting at the Fed, earning interest.
I don’t get how the comments say this is confusing. This analogy made perfect sense to me. In fact, it’s a brilliant analogy.
The fact that he didn't use the Big Bank/ Home loan as plurals bothered me on some deep level.
Oh, It's just 5 am and I'm just having my coffee.... I still somehow don't get it. I'll try to watch again in the evening :-)
did u get it bro?
Wait, so banks can borrow at the lower rate and park the money at the higher rate for an arbitrage? Seems like the feed is literally just handing money no strings attached at this point to banks...
Pretty much just an artificial money creation scheme as you get closer to the core.
Now I'm even more confused than before I watched this video.
what did the elevator have to do with any of this
Social Justice It’s a distraction for the slight of hand.
me too
The fed's cheap credit inflationary monetary policies have led to the largest misallocation of resources, over consumption, overvaluations, & rampant speculation in human history.
Why wouldn’t home loan be willing to accept a rate higher than 0.25%?
WSJ
+
FED
=
Boyfriends
WSJ and Feddy Fed are cozy. Send me a link...any link ...of your Mommy begging to differ... I could care less but now I'm curious? Regal me please. I'd love to see the proof. If so my praises will rain
Arguably one of the most confusing videos I've ever seen
Yeah I was completely unable to understand what you were talking about. Probably shouldn't be trying to teach anyone anymore.
well, good to know that the fed got better at influencing price and contraction of the money supply.
No explanation of what the corresponding instruments are and the respective institutions motivations are to purchase in contrast to alternate investments. I’m also confused.
Good to find that everyone finds it tough
In simple terms guys the interest rate set by a combination of IOER and RRP the range between the two is the FFR or interest rate this is then the benchmark that commercial and consumer loans are set so they will never be below the FFR as if banks lend you money cheaper than they get it you they make no money
This looks like a recipe for an economic collapse because the fed is expecting the economy to grow. How is the economy suppose to improve when restrictions are imposed on small business and big banks hoard the money? Did we learn nothing from 08'? Big banks need to be taxed and pay the united states back that money. Give us our bail out.
good point
How long did it take you to think that one up?
If im wrong please correct me,
FEDS- is backed by government yet it is private entity.
BIG BANKS- is the borrower and retailer of loans to consumers.
HOME LOAN(investment bank) - is backed by private investors only.
i think big banks uses a loan from home loans(investment banks) to retail it to consumers because investment banks cannot directly transact with the consumers. Then the FEDS role is to regulate interest rates and will give also a loan to the BIG banks and will earn some interest from it. Everyone is earning interest while the consumers will have their share also on acquiring debts to have the desired things. Consumer’s payment will pay all of the interest being circulated in the system. I’m not affiliate to any government or any financial institutions and even not schooled at financial courses. I just analized what the video is telling eventhough its very confusing at first.
This is one of the worst explanations of the fed funds rate.
The metaphor is very confusing.
What does it mean that the banks put the money in the level 0.25? Why are they making money from the FED?
What are Home Loans and why do they loan to the banks?
I have no idea what just happened...this confused me more.
Anyone else still confused??? The Federal Reserve Bank is a CORPORATION!!! It's as "federal" as UPS and Federal Express.
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What qualifications does a home loan banks need to borrow from fed/treasury directly? Is it reserves? Is it a matter of convenience for home loan banks to borrow from big banks? I guess market making is a family business too...but I thought I would ask although im not to bright
How about in the case of Negative interest rates
A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank.
vordark trinity which in turn creates bank runs and a super demand for safe havens and.. literally safes. just ask Japan
I have a question, Why does bank lend to other banks when the IOER is higher than federal funds rate ? It is safe and risk free? Then why lend?
😮 seven years no fed lessons are used
Where do Feds get the money to pay interest on the bank deposits?
The summary of this video. The Fed is screwed.
i dont get it... so u borrow money and u pay it back slowly? how do banks make profit if u pay off the dept? do u pay more than what u borrow slowly? idk
Seems like such a shallow system and that any number of outlying factors can disrupt it. Interesting.
You are right
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A bank takes 10% of the money it prints, interest rates are so that the the money that the banks pay themselves is not devalued.
Question: At 1:28 why can’t Home Loan earn interest from the Fed? Is it only Big Banks who are allowed to earn interest from the Fed by placing their money there? An average Joe can put his money with the Fed? I’m kind of new to this so please excuse my ignorance. However, I’d really to know. Thank you.
So how does an annual inflation rate deplete the purchase power of my deposits/investment? As the people that give currency it's value any rate above 0 hurts us, kind of opposite of the lenders!
you're asking a very complex question... For starters I would say most economists (with the exception of austrians) believe that a small rate of inflation is healthy for consumers (menu prices) and is far better then the alternative which is the risk of a deflationary cycle.
+SAIDsoe some deflation is considered "good deflation."
+SAIDsoe
US had deflation throughout the 19th century and was the fastest growing economy in the world. The reason people fear deflation is because of the great depression. But the great depression was not caused by deflation, deflation was caused by the great depression.
Keynesians got it wrong, Austrians got it right.
LibertyNow people dont want deflation becausr the home is there biggest investment underwater housing caused by deflatiin would be a massive problem. deflation more then 0.5 percent would lead to alot of problems this country is invested in assuming inflation will always be there(oherwise you dont buy things with nothing down). agree thought the goverment screwed up causing the depression
inorder to understand the simple scenario behind how bank interest( borowing / lending ) determine , factors influnce for this determination , will give you a better idea , if can elaborate the basics with a example.
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Why do federal bank fix interest rate more than 2% (maintenance expenditure) ??
Federal bank is government's own body to regulate and secure people's money not to earn profit.
Government's job is not to a business but to provide service to its citizens....All problems starts from federal/central bank.
how often do/Can Feds Change interest rates?
This is a terrible description of the Fed, the FFR, and the IOER etc.
The FFR is based normally on the Taylor rule.
And is the “target rate” for overnight borrowing between banks. Banks have required reserves, and if they aren’t at that amount before they close for the day, they have to borrow from another bank, or the FED discount window, at the discount rate to meet that requirement.
IOER is the interest on excess reserves, or money held above the requirement. It’s used so banks aren’t loaning it to foreign markets to try and generate revenue overnight when they couldn’t find someone to loan it to locally.
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I feel like I understand it a little more but I will still need to watch other videos..
Turned off at 17 seconds "overheating" is not acceptable as an explanation
"Overheating economy" is literally an economic term.
The Fed reserve gives money to Federal Home Loan to put into Reverse Repo Program? Also the federal reserve sets the interest rates for Big Banks and Federal Home Loan? But, How? Is this by Law?
way to make a simple concept hard to understand
Thank u for the illustration
. To bad im to slow to swallow in one video. Excellent job
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Might as well just say, "They can print money, don't worry about the rest"
If you are making money trading paper or digital numbers and letters around, without doing any actual work, (Actually producing a usable good or service), you're hustling somebody. No if ands or buts about it.
Wait.... WHAT?? I must be mentally stupid because I didn’t fully grasp the concept.
So home bank represents local banks or? Didn't really get that part
If you don’t get it it’s because your not supposed to
still didn’t understand sheeiit
Why would Home Loan want to earn below 0.25% interest rate?
anyone know of a good video that explains how they set the federal interest rates for dummies?
Interest rate is called Feds Fund Rate in their language. This video shows it but only helpful to a point. Actually, Feds does NOT set it as in set-and-stone. Feds set (set-n-stone) the lower bound (IOER) and upper bound (Discount Rate). Feds "specify" Feds Fund rate which is in between IOER and Discount rate (shown as elevator in the vid) and which all participants will eventually move towards. Banks can borrow directly from Feds, paying discount rate OR they can borrow from other banks, paying what the lending bank ask (which is higher than IOER). That way, they allow flexibility and exceptions. This is by design.
I’m still confused :(
This is not a good explanation... left me with more questions than answers
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So how is that I can borrow essentially risk free money and then arbitrage it with the Fed? Anyone, can I do this? The strong get stronger...
Can anyone explain to me why 'home loan' can't park the money in the 'fed' interest directly rather than having to pass through the bank... does that just come from law?
Because - Big bank are a group of banks that REALLY make up the Federal Reserve Board, They STAY in control, They ARE the OLD money that is what the Federal reserve is made up of!!! The SO CALLED -- HOME LOAN, are smaller banks and other lenders who WILL NEVER have as much money and lending power as the 12 big banks !!! During the LAST recession (really a depression) we REALLY had a great opportunity to FINALLY get the banks under control, BUT, our government officials ( who are supposed to work in our best interest), did little to nothing, and kept the banks in control-- and to make it worse- Most of the DODD - Frank Reform Bill -- that gave people protection and put more controls on banks, has been repealed by Trump and --- NO, Obama did Nothing EITHER ( he turned a blind eye, as they kept up the same game)
Is the IOER same as the Fed Discount Rate?
What a bunch of waffle.
Just get the rates back to normal assp.
Super cheap money is making asset bubbles everywhere
how do the feds get the money to pay for the interest paid to the banks?
They have a SERIOUS REAL relationship with the Treasury DEPT. ( treasury Prints whatever the fed wants AND the government passes bills in agreement to print!! AND the FED is NOT (REPEAT -- NOT) a arm of the government!! This goes ALL the way BACK the 1929 Depression. The BIGGEST, RICHEST PEOPLE -- JP MORGAN, Rothchilds AND OTHERS!!! Agreed to lend our government money for MANY RIGHTS and power OVER the financial system. the politicians agreed because these Rich FAMILIES backed their campaigns (This created a VERY convenient collusion and KEPT power among the few) this is called an Olligarchy!! This is our reality, disguised as a republic!!! Yet MUCH BETTER than ALL other countries!! Pretty bad !!
Well, it’s that time
The rate are now up because the economy is too good
That’s actually a good thing
Why can't home loan banks lend directly to consumers instead of lending to the big banks?
thank you for this :) 👍
WHAT?! What is home loan???
What it's about of quantitative easing (QE)?
Except its a lot more complicated then that, right.
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well visualized commentary 👍🏻
Do all you want... A few institutions can't replace true market forces & market forces alone. The market must determine its own interest rates
Date : 2020-01-13 th - - Time 21: 51: 59 (-5 GMT)
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pff interest rates at 0 for atleast 20 years. Fed cant pay dept,...
how does ioer sets the top range, is not that set the bottom range?
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what is the difference between home loan banks and big banks
It's supposed to confuse you. So you don't argue against the flaws in this monetary system. The FED will take your money at will through inflation. Always having the upper hand.
NOW, in my honest opinion, if I saw that the Fed was using this power control system to make the US economy more prosperous I wouldn't be mad at this system. But let's be real, the FED and the Big Banks are acting mostly in self-interest.
To hedge yourself against this (IMO flawed) system, buy Bitcoin, Ethereum and 2-5 top cryptos + some gold/silver. Not with all your liquid capital but perhaps 5-25%. In case we see a 2008 crash x 10 this will save you. Literally.
I did not understand, but thanks
Omg that was 5min of life I won’t get back.
What qualifications does it take for small bank to deal directly with fed? Or maybe im handicapped and don't realize that there is more than being " qualified" please
My bad , at what conviennce,or lack there of, ( reserves included) can the home loan banks borrow directly from the fed/treasury dept?...what qualifications are needed?
anyone who needs interest rates explained also needs basic terminology defined. what does ^fed^ mean here? is it talking about the federal bank or what? and if indeed the fed bank then what is it exactly? i understand it's actually a private entity this fed bank correct? this is so confusing!
Why does the metaphor have to be an elevator?
sorry but i couldnt understand a bit of it .... i was lost in that building
I like the music
sounds like a mess
I'm even more confused
Can someone please tell me what an interest rate is? Also, can you use simple words? Thank you!
+babiedaydreamer96
Interest Rate == Feds Funds Rate. The former is day-to-day word
IOER, interest on reserves and excess reserves => Lower bound for Feds Funds Rate
Discount Rate == Upper bound for Feds Funds Rate
Interest rate is a range, NOT set by Feds but Feds give strong incentives to banks to finally reach that rate.
Interest rate is actually interest on interbank loans charged by lending bank to borrowing one.
Each bank can charge any rate they want (to another bank) but they don't in reality. Because if they charge excessive, nobody will borrow since the borrower can simply get it cheaper from Feds, Discount Rate.
And the borrower can't borrow if it can't pay around Feds Funds Rate simply because nobody will lend it. By not lending it, potential lender earns more simply by IOER from Feds. Thus IOER serves as lower bound.
Reverse Repos are special tool to get the banks back into above mechanism. It is used in special situations where banks have plenty of reserves. I understand it but don't include it here.
I still don't get it..