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How the Fed Actually Sets Interest Rates
Description
In this episode, Lucas and Luna drill into the mechanics of how the Federal Reserve sets its benchmark interest rate — the federal funds rate — and why it matters for your wallet. They walk through the Fed's two main policy tools: interest on reserve balances (IOER) and the overnight reverse repurchase agreement (ON RRP) facility. Lucas explains why the Fed now targets a range rather than a single number, and how the overnight repo market briefly broke in 2019, forcing the Fed to create a standing repo facility. By May 2026, the fed funds rate sits at 4.00%-4.25%, and the hosts explore what that means for mortgage rates, credit cards, and business loans. Luna pushes back on whether the Fed actually controls long-term rates, leading to a clear explanation of how market expectations and the term premium influence 10-year Treasury yields. The episode closes by asking whether the Fed's next big challenge is losing control of the short end again — and what that would mean for markets.