Question

What is the relationship between the Federal funds rate and the prime interest rate? Why doesn’t the Federal Reserve target the prime interest rate? How is the Federal funds rate established? What role does the Federal Reserve play?

Answer 1

The federal funds rate and the prime interest rate are determined as interest rate by the market. Both of this interest rate is determined by the interaction between the demand and supply in their respective markets.

For the unsecured, short-term loans the bank will charges over the other institution. The rate that charges is known as fund rate. The rate for the overnight lending in the commercial banks will lows down.By selling government securities in the open market the fed can increase, it's rate. To set the federal funds rate, the federal open market committee( FOMC) of the federal reserve system will meet eight times in a year. FOMC sets a target rate than the exact rate.