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Rate Expectations
Planet Money
When Rates Fall, Markets Shift in Unison
The Interest on Reserve Balance (IORB), which is primarily accessible to banks, is crucial for understanding how rate changes influence the economy. When the Federal Reserve announces a cut to the IORB, expected to be around a quarter or half percentage point, banks become less incentivized to hold funds at the Fed due to reduced interest payments. As a result, they are more likely to increase lending to other banks or customers, potentially at lower rates, leading to greater liquidity in the market. This shift does not happen gradually; rather, it occurs rapidly as market participants adjust to the new rate, showcasing a synchronized response across the financial landscape. Rather than individual movements, the market reacts instantaneously to the rate change, creating a swift ripple effect throughout the economy.
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