ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The federal funds rate is the target interest rate set by the FOMC. This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The FOMC sets a target federal funds rate eight times a year, based on prevailing economic conditions.

Detailed explanation-2: -About the FOMC The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations.

Detailed explanation-3: -The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System (the Fed) that is charged under United States law with overseeing the nation’s open market operations (e.g., the Fed’s buying and selling of United States Treasury securities).

Detailed explanation-4: -Because the interest on reserve balances rate is an administered rate, the Fed can steer the federal funds rate by adjusting the interest on reserve balances rate. In fact, interest on reserve balances is the primary tool the Fed uses to adjust the federal funds rate.

Detailed explanation-5: -Understanding Open Market Operations (OMOs) Open market operations is one of the tools that the Fed uses to keep the federal funds rate at its established target. The U.S. central bank can lower the interest rate by purchasing securities (and injecting money into the money supply).