Chapter 3

Federal Reserve (central bank) and fixed income markets

Chapter Summary

The key roles played by central banks are described in this chapter. The Fed’s open market operations and its role as the lender of last resort are discussed. The mechanisms the Fed uses for promoting financial stability, orderly growth, and price stability are explained. The historical behavior of target fed funds rate and effective Fed funds rates are presented and analyzed. The relationship between effective Fed funds rates and LIBOR is discussed. The chapter ends with a brief analysis of the actions taken by the Fed to combat the credit crisis of 2007–2008.

3.1 Central Banks

The central bank of a country is solely responsible for formulating and implementing the ...

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