Markets - Money markets

Introduction

On the face of it you might have thought that once the Federal Open Market Committee (FOMC) of the US Federal Reserve has pronounced what the official interest rate will be, that would be it until the next meeting. Nothing could be further from the truth. Once the official rate has been set, the work begins to make sure that the FOMC rate is maintained in the money markets. In this section we look at how that is done.

• Explanation - a good starting point for finding out how interest rates are kept at the level set by the FOMC.
• Theories - more detail on some of the theories behind maintaining interest rates. What determines the equilibrium interest rate? What are 'repo' operations? How does the Federal Reserve Bank create a shortage each day?
• Worksheets - some worksheets to help you test your understanding of interest rates.
• Further work - other areas of economic theory that you may want to consider when studying money markets and the effects of interest rates.

Before looking at this section it would be useful to have looked at the work of the FOMC to see how they set interest rates.