The Federal Reserve is expected to drop the federal funds rate to 0.5% today, the lowest it has ever been. When the Fed drops rates, its intent is to increase lending between banks. This drop, however, will likely have no effect on the bank’s lending practices.
This rate is just a target, and it doesn’t dictate the exact rates banks offer each other. In fact, banks have been recently offering each other rates much closer to zero, and interbank lending is still moving slowly.
When the Fed has nowhere else to go, they begin “printing money.” I hear this term in the media, and the most obvious assumption is that “printing money” means that the Bureau of Engraving and Printing speeds up their presses and pumps out more $1, $5, $10, $20 and $100 bills. At least, that’s what I thought until recently. That’s not quite how it works.
“Printing money” is what the government calls it when they raise money by buying back short-term debt from the public, call them bonds or Treasury bills. Companies and individuals can buy money from the government, money that doesn’t really “exist” until it is purchased.
Published or updated December 16, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.