I know what the fed funds rate is. My question is WHY do they all follow it? If I’m selling something and my competitors are at 7%, why wouldn’t a bank do 6% to capture the market?
In: Economics
To answer your final question – because then all your competitors would do 6% and then you and all your competitors would be 1% worse off.
They depend on the fed rates because that’s where they get their funds from to loan to you. If they loan to you at a lower rate than the fed rate, they are losing money. That sets the floor.
Free market idealists like to espouse their religion that free market competition invariably leads to lowest prices. In reality, market players often realise they are best off reaching an unspoken truce in which they don’t attack one another.
Latest Answers