Information > Financial Terms > This page Money Market In
a broad sense, any demand for and supply of funds and credit; in the technical
sense, the open market, as contrasted to personalized borrower-lender
relationships for short-term funds and the capital market for longer-term
funds (government and municipal bonds, and corporate bonds and stocks)
provided by dealers and underwriters (both outstanding and new issues).
The national money market in the Structurally,
the
Federal funds At
one time, when open market call and time loans to brokers could be arranged
through the money desk of the New York Stock Exchange, such brokers' loans
could also be classified as part of the money market.
At the close of World War II, however, the money desk was discontinued,
and such brokers' loans are now arranged directly between the banks and
brokers concerned. The
primary dealers of
Banks
Nonbanks Federal Funds These
are immediately available claims upon reserve accounts of member banks
at the Federal Reserve Bank. Member
banks resort to federal funds for the adjustment of reserve positions
when needed for legal reserve purposes.
Lending banks, in turn, earn some return on idle excess reserves
at the Fed without tying up the funds on the loan for more than a day.
For example, Bank A has excess reserves at the Fed; Bank B needs
reserves for legal reserve requirements.
Bank A will make the desired sum available to checks:
Bank A draws a check on its reserve account at the Federal Reserve
Bank, payable to Bank B, and delivers it to Bank B in return for Bank
B's cashier's check, payable to Bank A, for the same principal sum plus
one day's interest at the current federal funds rate.
Bank B will receive immediate credit to its reserve account for
its Fed deposit of Bank A's check on the same day; Bank A will present
Bank B's cashier's check at the clearinghouse and settlement will be made
the following day. Net result:
a loan of federal funds from Bank A to Bank B for one day at the
prevailing rate for federal funds. If
the lending and borrowing banks are located in different Federal Reserve
districts, the Federal reserve banks concerned will figure in the loan
of federal funds. Bank X in
Money
brokers, if they figure in federal funds deals, may charge no commission,
in return for the expectation that the bank provided the service will
continue to favor the broker with security orders (e.g., such brokers
may be New York Stock exchange members, such as Garvin, Bantel & Co.,
which also deal in government securities), or may charge a fractional
commission (annual rate of 1/16th or
⅛th of 1%). Banks
acting as brokers in such federal funds deals do so without charge for
correspondents. See
MONEY BROKER. Alternative
methods of obtaining reserves might involve two or more days; federal
funds, if available, provide the quickest and cheapest way for member
banks to obtain reserves at the Fed. The
rediscount rate of the New York Federal Reserve Bank normally acts
as the ceiling for the New York Federal funds rate, for the alternatives
of loans or advances at the bank would be cheaper if the federal funds
rate went higher. Whenever
money is easy, the federal funds rate will be well below the rediscount
rate, reflecting an ample supply of excess reserves of member banks.
Because of its sensitive reflection of member banks' money positions,
the federal funds rate is regarded highly by the New York Federal Reserve
Bank as an indicator of money market conditions, although its attention
in latest years has primarily been on the monetary aggregates for purposes
of MONETARY POLICY. Repurchase
agreements (sales by government securities
dealers to member banks, with an agreement to buy back the securities
one of more days later) and loans by out-of-town banks to government securities
dealers are often settled in federal funds.
The New York Federal Reserve Bank also utilizes such repurchase
agreements to assist the money position of Treasury Bills These
shortest term of the Negotiable Time Certificates of Deposit Beginning
in 1961, the larger banks began to offer negotiable time certificates
of deposit (CDs), a new money market instrument intended to attract and
to keep corporate funds that otherwise would find investments in other
money market instruments. Time
CDs have short-term maturities, with yields which increase in proportion
to the length of the maturities, and are issued in larger denominations
of $0,5-$1.0 million minimum for the larger banks (no less than $100,000
for smaller banks). Certificates of Deposit First
introduced to the domestic money market in 1961, negotiable certificates
of deposit issued by Eurodollar Certificates of Deposit These
are dollar-denominated negotiable certificates of deposit issued by banks
abroad, either by foreign branches of Bankers Acceptance These
are obligations of those banks which accept drafts drawn pursuant to commercial
letters of credit (largely in foreign trade).
Instead of holding them for investment until their final maturity
and payment, their holders may sell them to bill dealers in the money
market, who in turn sell them largely to other banks desiring such a high-grade
short-term obligation for investment, especially foreign banks.
Bill volume is secondary in size and activity to that in Treasury
bills. See LETTER OF
CREDIT. Commercial Paper These
are short-term promissory notes (four- to six-month maturities as a rule)
of nationally known and highly rated companies, placed through commercial
paper dealers, who in turn sell the paper to commercial banks and other
buyers. The largest finance
companies place their own paper directly with investors in the Summary. The
appended tables compare average annual rates for various sectors of the
money market and annual money market instruments amounts outstanding for
selected years. BIBLIOGRAPHY COOK,
T.Q., and ROWE, T.D. Instruments of the Money Market.
Federal Reserve Bank of |