Fed fund return Essay Example

Fed fund return is the term used in the United States of America. Fed fund return is the rate of return or the interest rate at which the financial institutions especially the depository institutions like credit union and bank lend the excess of its balance, often known as reserve balance, to the other similar kind of depository institutions without having the collateral. The fund that is deposited in the Federal Reserve to maintain the reserve requirement as specified by the regulatory body is called reserve fund.
Bear Stearns and Lehman Brothers did not collapse in a single day. The series of event took place before the bankruptcy of these two financial giants of the United States. Bear Stearns’ financial problem came publicly visible in the first quarter of 2008. It was on May 29, when Bear Stearns was acquired by JPMorgan chase. The Fed fund return was slowly following the path of downfall during the collapse of Bear Stearns. In February 1, 2008, the rate was 3.12% but this rate came down to 2.69% during mid March. Though the Fed fund return showed upward movement movements as well, but this pull was not strong enough and it eventually fell down. From the beginning of April, the return fell sharply to around 2%. So, during the collapse of Bear Stearns, the return rate was about 2% and it was even touching the 1% line.
When Lehman Brothers collapsed in September 2008, the rate was highly volatile and still in the red zone. The fed return rate was in between 1% and 2% margin. The return rate was highly fluctuating with standard deviation of as high as 1.95. During the fall of Lehman Brothers, the return was as low as 1.05%. Hence, the rate of return was on the continuous downfall movement from the downfall of Bear Stearns and to the fall of Lehman Brothers.
Effective Fed Funds Return is the return that is calculated by New York Fed. It is the measure of the Fed funds rate overnight. It is calculated by taking the weighted-average of the entire rate at which the overnight fed funds transactions were conducted.
On the other hand, target Fed funds return is the pre-determined target level of the Fed fund return for the overnight transaction. Based on the historical rates, Federal Open Market Committee sets a Fed funds return for the overnight transaction called as targeted fed fund returns.