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Strategies & Market Trends : Tech Stock Options
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To: Kevin who wrote (2406)6/7/1996 3:55:00 PM
From: Pascal A. Mons   of 58727
 
Federal Funds is not a set rate for the good reason this rate apply for Reserves traded among commercial banks for overnight use (in amounts of $1 million or more).

Nonetheless the Federal Reserve SET a target for the Federal Funds Rate whatever you may think of it ? (I guess we can speak of that after the next OMC meeting), meaning that the Federal Reserve intervene in that market to keep its target in line.

The Discount Rate is ALWAYS lower than the Federal Funds Rate.

What you are referring to is a 10% movement ON THE INTEREST RATE ITSELF. It would be absurd to think that Fed Funds go in one day from 4.25% to 10% and the Federal Reserve's playing Golf at the same time... Just unheard of... to me. What might be possible is a rise to 4.67% (a 10 % rise) tgough exceptional, I agree.

I have a more recent example out of the Wall Street Journal dated May, 9th 1996 :

As you know the Discount Rate is : 5%

Federal Funds : 5 1/2% high, 5 3/8% low, 5 7/16% near closing bid, 5 1/2% offered.

That day the spread was 1/8%.

Furthermore, this rate is the principal source of funds for commercial banks. That's why this rate is detrimental to any rate applicable to the public (prime and the rest, mortgage rate is more closely defined by the US Treasury 30 years + 1% and has nothing to do with the Discount Rate).
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