What's the difference between "Effective Fed Funds Rate" and the "Interest Rate" for US

CFA Level I Economics
#1

Hello,

Can anyone tell me the difference between the EFFECTIVE fed funds rate and the interest rato for the US. For what i can see the interest rate is “fixed” but in charts i found in St Louis Fred the Effective fed fund rate “moves” a little. Is this because of the 0.25%-0.5% level? Why does it move?

Thanks for your help

#2

Fed Funds rate is the rate charged by banks for overnight transactions with one another. The “interest rate” should be the market rate for a particular maturity and moves all the time. What are you looking at when you say “interest rate”?

#3

I’m looking at this two series:

http://www.tradingeconomics.com/united-states/interest-rate (fixed rate)

https://fred.stlouisfed.org/series/DFF (the rate has some movement)

What’s the difference between this two?

#4

One is the target rate and one is the effective rate.

#5

The one on trading economics is based on the target rate (the upper level of the target range). Currently the target range is 50-75bps and the rate is 75bps.

The latter (EFFR) is market determined and is based on a volume weighted average (median) of overnight fed funds transactions. This figure currently at 66bps is roughly around the average of the target range (which would currently be 62.5bps) though it needn’t necessarily be so.