The Federal Open Market Committee implements monetary policy by raising or lowering its target for the federal funds rate, the interest rate banks charge each other for overnight loans. Because the Federal Reserve has no direct control over most interest rates, it relies on arbitrage in money markets for the change in the fed funds rate to be transmitted to other short-term rates, thus causing all short-term rates to move in tandem. This transmission to other rates is an important first step for the Fed’s actions to influence the real economy. In this post, we describe the major developments that have affected ... (full story)