How the Federal Reserve Influences Interest Rates

Summary

The document examines whether a Federal Reserve rate cut is simply the result of bond purchases that raise bond prices and lower yields. The responses explain that the Fed announces a target for interest rates and uses its operations to steer prices and rates toward that target. This frames rate changes as an announced policy objective supported by market actions, rather than only as an indirect effect of bond supply and demand.

The Fed may also change the discount rate, the rate it charges banks for borrowing, alongside changes to the federal funds target. Banks can borrow through the discount window, though the response notes that perceived stigma may discourage its use. The discussion is brief and does not detail the mechanics or scale of bond operations, nor does it distinguish different policy tools or market conditions. It offers a conceptual clarification rather than empirical evidence or a full account of monetary policy transmission.

Key ideas

• The Federal Reserve announces a target rate and uses its operations to steer market prices toward it.
• Bond purchases and sales can affect bond prices and yields through supply and demand.
• The Fed may adjust the discount rate when changing its federal funds target.
• Banks may avoid discount window borrowing because of perceived stigma.

Tags

# FED rate cuts don't exist


# FED rate cuts don't exist












I would just like to confirm my understanding of how the FED controls interest rates. In my view there's no such thing as changing an interest rate. Because rate/yield is just an effect of price action.

So when the FED 'cuts rates', it starts buying more bonds. When the FED does a rate hike, it sells bonds. It's just simply supply and demand affecting yield.

So also the explanation of let's say 'a new bond being in town' with a higher yield is not right in my view. In general there's a dumping of bonds increasing yield over the board.

Can anyone confirm?

## Answer by kurtosis (score 1)

https://quant.stackexchange.com/a/57267

The Fed announces targets for where they will push prices with their (effectively unlimited) funds. So yes, they do in effect announce rate cuts. Furthermore, they often cut or raise rates on the discount rate, the rate at which they lend to banks, when they cut or raise the Fed Funds rate target. They may also lengthen or shorten the discount window (the length of time they will lend for).

## Answer by vince (score 0)

https://quant.stackexchange.com/a/57270

They can also lower the discount window rate. But apparently there's a stigma for banks that use it.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.