The Lemon Fool

Does anyone know why the Fed sets a target rate such as 4.50%-4.75%, instead of setting a single fixed rate as is done by most other Central Banks?

Are there any other Central Banks that do this? It seems a bit odd. What is the purpose of it? And why are they the only Central Bank who do it?

They seem to have set a single fixed rate until December 2008, and then they seemed to move to a target range. Was there any official statement made about this change? And are they likely to return to a fixed rate in the future?

http://www.fedprimerate.com/fedfundsrat ... istory.htm

It's been like that, as you say, since the GFC in 2008. From memory, the FED set rates (paraphrasing) at 'near zero with a target rate of zero 0-25 bps'

...and it's been that way ever since.

Tedx wrote:It's been like that, as you say, since the GFC in 2008. From memory, the FED set rates (paraphrasing) at 'near zero with a target rate of zero 0-25 bps'

...and it's been that way ever since.

But why are they the only Central Bank that does this? What is the purpose of it?

The BoE, ECB, BoJ, Swiss, etc. have no need of such a thing. Why not just set a fixed rate like every other Central Bank has always done, and like they always did before 2008 ?

It doesnt really answer the question as to why a range was used subsequently but might be a starting place to find an explanation, perhaps by trawling through FOMC press releases:

Between December 2008 and December 2015 the target rate remained at 0.00–0.25%, the lowest rate in the Federal Reserve's history, as a reaction to the Financial crisis of 2007–2008 and its aftermath. According to Jack A. Ablin, chief investment officer at Harris Private Bank, one reason for this unprecedented move of having a range, rather than a specific rate, was because a rate of 0% could have had problematic implications for money market funds, whose fees could then outpace yields.[11]

From https://en.wikipedia.org/wiki/Federal_funds_rate#Historical_rates

gpadsa

gpadsa wrote:It doesnt really answer the question as to why a range was used subsequently but might be a starting place to find an explanation, perhaps by trawling through FOMC press releases:

Between December 2008 and December 2015 the target rate remained at 0.00–0.25%, the lowest rate in the Federal Reserve's history, as a reaction to the Financial crisis of 2007–2008 and its aftermath. According to Jack A. Ablin, chief investment officer at Harris Private Bank, one reason for this unprecedented move of having a range, rather than a specific rate, was because a rate of 0% could have had problematic implications for money market funds, whose fees could then outpace yields.[11]

From https://en.wikipedia.org/wiki/Federal_funds_rate#Historical_rates

gpadsa

Thanks.

It still seems a very odd thing. Why could they not just set it at 0.1% or 0.25% like all of the other Central Banks ? And now with rates at 4.50%-4.75% there is presumably no reason for them to continue with this rather strange range for any longer.

Now I read the rest of that wikipedia page https://en.wikipedia.org/wiki/Federal_funds_rate and it is actually really well written & informative (don't test me on my understanding though). As it says

this is commonly referred to as "setting interest rates," the effect is not immediate and depends on the banks' response to money market conditions.

so presumably having a 0.25% range gives useful wiggle room as the mechanism is indirect, and there aren't too many complaints when it strays from one exact value.

The more technical explanation of how it works seems to be at FOMC but I didn't want to risk making my head hurt so didn't study it carefully (too many acronyms) https://www.federalreserve.gov/monetarypolicy/openmarket.htm

gpadsa