I have a question about the federal funds rate that I haven't ever had a good explanation for. It is: To what extent is the fed funds rate set to match market demand, and to what extent is it controlled completely independently of market demands? If anyone has a good answer, I would appreciate it a lot.
To flesh out my question a little further, let's say that the fed decides one day to change the fed funds rate from 1.75% to 2%. They put the bonds up for auction and find out that they were only able to auction off the allotment of bonds at an effective rate of 1.8%. Is this typical? Or is it usually the case that the bond buyers will quickly hoover up whatever rate they are given?
Maybe a more formal way to put it- is the elasticity of demand for these bonds low enough for the fed to have complete control over the fed funds rate such that they can set any interest rate they desire?
To flesh out my question a little further, let's say that the fed decides one day to change the fed funds rate from 1.75% to 2%. They put the bonds up for auction and find out that they were only able to auction off the allotment of bonds at an effective rate of 1.8%. Is this typical? Or is it usually the case that the bond buyers will quickly hoover up whatever rate they are given?
Maybe a more formal way to put it- is the elasticity of demand for these bonds low enough for the fed to have complete control over the fed funds rate such that they can set any interest rate they desire?