Interest Rates - Fed Target Range

Think of it this way

It is the highway speed limit, with its maximum and minimum. It tells you how fast you are allowed to go, not how much traffic there is today: for that you have to watch the EFFR moving within the lane.

What is Interest Rates - Fed Target Range?

The interest rate corridor the Federal Reserve sets at each FOMC meeting, with its two lines. The CEILING is the upper limit, and above it the Fed considers the market to be paying too much for money. The FLOOR is the lower limit, and below it there is considered to be so much surplus cash that nobody can find a place to put it. There are normally 25 basis points between the two, and that is where the rate at which banks lend to each other should move. They are not a market data point: they are a decision, and they move in steps because they change only when the committee votes.

How to read Interest Rates - Fed Target Range

Two flat lines forming a band, with steps on the committee's meeting dates. What you should do with this chart is overlay the EFFR from “Compare with”: the position of the effective rate WITHIN the band is all the information. Stuck to the floor means there is surplus money; approaching the ceiling means it is starting to become scarce and the Fed will have to intervene. Lag: none; a rate is priced in on the same day.

What Interest Rates - Fed Target Range means for the market

It is the price of money on which everything else hangs: a family's mortgage, a company's loan and the valuation of any asset that promises future profits. But for this section it matters for a more specific reason: the floor of the range is held up by the interest the Fed pays banks on their reserves, so it sets the minimum below which no bank will lend to anyone.

Where the money flows

Not a single dollar moves here: it is twelve people voting in a room. But what a bank charges you for your mortgage and what it pays you on your deposit depend on that vote. Example: when the committee raised the range throughout 2022, banks began charging each other more, and within a few weeks that passed through to businesses and households.

What to watch in Interest Rates - Fed Target Range

Overlay the EFFR and look only at the gap between it and the ceiling. As long as the effective rate sits comfortably below, the system has ample reserves. When that gap narrows until they almost touch, the market is asking for more money than is available at the official price, and the Fed has to intervene one way or another, adjusting interest on reserves or letting repo absorb the pressure.

The official price of money. It does not move liquidity on its own, but it conditions everything else.