Isn’t the Fed Funds Rate simply the rate banks pay each other for excess deposits held at the Fed? If I understand this right the Fed doesn’t “set” the rate - it manipulates the interbank market by either buying bonds or selling bonds. If they buy bonds banks have lots of reserves and the FFS rates drop. If they sell bonds, they soak up bank reserves and the FFS rate climbs.
I suppose the Fed could calibrate its bond buying/selling so that FFS is equal to SOFR, but there would still be an FFS rate. There is a real market behind the FFS - it is just a manipulated market.
Note that LIBOR was never a market rate the way FFS is - it was set by estimates from a handful of UK banks. Since it was an administered rate set by a committee, it was easily manipulated. This happened during the GFC.
Isn’t the Fed Funds Rate simply the rate banks pay each other for excess deposits held at the Fed? If I understand this right the Fed doesn’t “set” the rate - it manipulates the interbank market by either buying bonds or selling bonds. If they buy bonds banks have lots of reserves and the FFS rates drop. If they sell bonds, they soak up bank reserves and the FFS rate climbs.
I suppose the Fed could calibrate its bond buying/selling so that FFS is equal to SOFR, but there would still be an FFS rate. There is a real market behind the FFS - it is just a manipulated market.
Note that LIBOR was never a market rate the way FFS is - it was set by estimates from a handful of UK banks. Since it was an administered rate set by a committee, it was easily manipulated. This happened during the GFC.