If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be:

Question

Quizplus · Accepted Answer

If the demand for reserves increases while the current market federal funds rate equals the target rate, the market will likely face a shortage of reserves, which will make lenders charge a higher interest rate for an overnight loan of reserves. This will increase the market federal funds rate above the target rate, prompting the Fed to intervene by injecting more reserves into the banking system, which will increase the supply of reserves and push the market federal funds rate back to the target rate through market operations.

If the Current Market Federal Funds Rate Equals the Target