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The Federal Funds Market since the Financial Crisis

The Federal Funds Market since the Financial Crisis

The Federal Funds Market since the Financial Crisis

April 5, 2017

Summary

Understanding the Federal Fund Market

The 2007/2008 financial crisis has largely influenced how banks operate today. Prior to the crisis, most of the banks would give lending to those institutions that needed shortfall liquidity to address market challenges through the overnight Federal Reserve loan. After the crisis, the Federal Reserve had to include more than just banks in the process of borrowing and lending to influence the accumulated funds. The increase in the accumulated funds has been characterized by enactment of policies allowing more institutions to be partakers of the federal fund. As the article by Craig & Millington (2017) expresses, owing to the crisis, the Federal Reserve has been keen to enhance the market operations and one way of doing this has been to control to flow of funds to overnight collapse of firms as witnessed before. At the same time, increase of funds at the Federal Reserve has made it possible for the Federal Reserve’s rate to cancel out making such rates neutral and stable.

Association to Specific Chapter Material and Concepts

Chapter 11: Liquidity and Reserves Management: Strategies and Policies

Reserve market rates – the rate at which the Federal Reserve lends funds to institutions.

Federal Fund market – a platform created by the Federal Reserve to allow depositors who have exceeded their reserve requirements to lend their reserves

Stored liquidity - assets

Purchased Liquidity - liabilities

            The above chapter addresses how banks may rely on Federal Reserve borrowing to finance operations. However, the Federal Reserve target rates are volatile and may change depending on the external influences. The article also notes important aspects and options that bank may have to choose from should the federal fund fail (Rose, & Hudgins, ND).

Reasons for Choosing the Article

            The above article is relevant to the chosen tittle in that it offers a theoretical view of how the market performs or how it has been operating to how it is today. A student in the field of Economics can now comprehend the role of the Federal Reserve, how it relies on the market rates to determine what borrowing should be made to a banking institution. Banking institutions can also borrow an idea on the impact of relying on such avenues to fund their operations. The article also gives a snippet view of how the financial market has transformed after the crisis and some of the measures that the Federal Reserve has had to adorn to make the federal fund market relevant. I choose the above article since plays an important educational to corporations and economists who would like to learn how the financial market operates.

Important Lessons from the Article

            There are several lessons that one can borrow from the article. First, the article has shown how the volatility of the Federal Reserve market may influence a bank standing especially considering that the rates are very like to change depending on the borrowing being made and the funds available. Second, the article also introduces an important element of how the banking system works. Anyone interested in working in such a field has to know that banks have to have a specific reserve requirement, which is also likely to change with time. In addition, the banking industry tends to change quickly, thus an individual that choose the federal fund as their overnight option to make returns must do so in consideration of the market factors rather than their own financial state.

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The Federal Funds Market since the Financial Crisis

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