The Federal Open Market Committee (FOMC) sets or manages several interest rates related to monetary policy. The FRED Blog has discussed this before. Today we tap into some recently added FRED data to describe how the Federal Reserve System keeps the effective federal funds rate (the FOMC’s preferred monetary policy instrument) between its upper and lower target range limits.

The FRED graph above shows two different categories of rates.

• An interest rate set by financial markets
  • Solid red line: The effective federal funds rate, which is set by financial institutions who charge one another for overnight loans in what is known as the federal funds market.
• Interest rates set by the FOMC
  • Dotted orange lines: The targeted upper and lower limits of rates for trading in the federal funds market, described above.
  • Dashed dark blue line: The Discount Window primary credit rate, which is the overnight rate charged to financial institutions that borrow from Federal Reserve Banks.
  • Dashed light blue line: The Standing Repo Facility minimum bid rate, which is the minimum bid rate accepted by the New York Fed for propositions in Standing Repo (repurchase agreement) Facility operations. Repo transactions add short-term liquidity to financial markets.
  • Dashed purple line: The reverse repo (repurchase agreement) award rate, which is the minimum bid rate accepted by the New York Fed for propositions in reverse repo operations. Reverse repo transactions withdraw liquidity from financial markets.

In short, Federal Reserve Banks (which manage the discount window in their own Districts) and the New York Fed (which manages daily repo and reverse repo transactions) generally maintain the effective federal funds rate within the target range set by the FOMC.

The New York Fed’s website has more detail about daily financial markets and monetary policy implementation.

Notes: Don’t worry if you can’t separate some of the lines in the graph: Both the Discount window’s primary credit rate (in dark blue) and the Standing Repo Facility minimum bid rate (in light blue) are closely linked to the top of the target range (in orange). Similarly, the reverse repo award rate (in purple) is closely linked to the bottom of the target range (in orange). These relationships are a matter of choice, not rule.

How this graph was created: Search FRED for and select “Federal Funds Target Range – Upper Limit.” Click on the “Edit Graph” button and select the “Add Line” tab to search for “Discount Window Primary Credit Rate.” Don’t forget to click on “Add data series.” Repeat the last two steps to search for and add the other four series: “Standing Repo Facility Minimum Bid Rate”, “Federal Funds Effective Rate”, “Overnight Reverse Repurchase Agreements Award Rate”, and “Federal Funds Target Range – Lower Limit.”

Suggested by Diego Mendez-Carbajo.