Role of the Federal Funds Rate - How the Fed lowers the Federal Funds Rate

4 important questions on Role of the Federal Funds Rate - How the Fed lowers the Federal Funds Rate

How does the Fed lower the Federal Funds Rate?

By conducting an open-market purchase of government securities. This action increases bank reserves.

What does the Fed do to push the Federal Funds Rate down?

The central bank buys government securities to increase bank reserves.

What effect does increasing reserves in banks have?

It makes reserves more plentiful, leading to a lower borrowing price.
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What happens to the price of borrowing reserves when they are more plentiful?

The price of borrowing them, known as the Federal Funds Rate, falls.

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