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Another of the Fed’s financial powers is its ability to influence the interest rate. The Fed does this by changing the default rate at which it loans money to fellow banks. Since the Fed’s default rate is one of the major factors in determining the nationwide prime interest rate, the Fed’s actions can indirectly increase or decrease the yield from interest-accruing assets. This in turn plays a role in determining investor behavior, and the trends of the market as a whole.

This is a very poor explanation of the Fed monetary policy. The rate that the Fed lends money to depository institutions is called the Discount Rate. That is set above the nominal rate which is the rate that the depository institutions lend money to each other to meet reserve requirements at the Fed. The nominal rate is what is commonly known as the Fed Funds rate. It is set by open market operations.

The prime rate is the rate banks give to their most credit worthy customers, generally large institutions.

Great explanation!

The Fed Monetary article will be updated with your additions minus the information about the prime rate! We will add the prime rate term to our list of new terms coming out in the future. Thanks again! -Forexgump 11:23, 13 April 2007 (CDT)

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