Hi what’s the difference between the fed funds rate and the interbank rate? In LOS 28a. it goes on to say that the fed funds rate is set on the discount rate set by the FED yet it also says that the interbank rate is a market set rate. Are they not the same?
Fed funds rate is the rate at which the bank can borrow from the Federal Reserve. The interbank rate is the rate at which banks lend to each other.
The Fed Funds rate is the rate at which depository institutions lend funds AT THE FED to one another, usually very short term (overnight). Important to this concept is the fact that member banks keep deposits on hand at the bank. The interbank rate (LIBOR, ex.) is the rate at which banks lend to one another in the market on a short-term basis. The Fed targets ranges for the Fed Funds rate, while the interbank rate is market determined. The discount rate is the rate at which member institutions may borrow money from the Fed discount window. I’m loathe to say it is the rate at which ‘banks’ can borrow because it is usually for member depository institutions but recall the unprecedented step in 2008 that allowed investment banks, entities not taking deposits, to borrow from the discount window. The problem is I don’t recall whether these now dead investment banks became bank holding companies before being allowed to use the discount window.