The federal funds target rate is the interest rate set by the Fed's monetary policymaking body, the Federal Reserve Open Market Committee (FOMC), at its eight annual policy meetings. The federal funds effective rate (the discount rate) is the actual rate of interest banks charge each other for loans to meet reserve requirements. Why do depository institutions need federal funds? They are required to balance their books every night at COB, and they must borrow if their outstanding loan balance exceeds the the required fractional reserve rate (established by the FR). This is intended to temper demand for commercial loans in the economy. And this is where the flaw lies.
[The Board of Governors of the FR and 5 of the the presidents of the 12 FR banks form the body of the Federal Reserve Open Market Committee (FOMC). These officials are bankers first and (perhaps) "top rated economists" (TRE) second. The body of TREs is like a self-licking ice cream cone. They are all card-carrying adherents to the apparently omnipotent "Chicago school" of economics established by Milton Friedman. This school of economics is designed to drive the society into two segments--the haves and the have-nots. And it works!]
Back to the flaw" In 2008 it was painfully revealed that banks were not lending much into the real economy (where goods and services make the market). They were lending into a much more lucrative and very crooked casino for rentier speculation. Like all Ponzi schemes, this one crashed in 2008. The corruption extended beyond Wall Street into the US Treasury Dept., and to the useful dunce in the Presidency, who rubber-stamped the raid on the Treasury that began with TARP and ended with QE. This raid created more than $26 trillion from thin air and distributed it strictly to the perps. The "loan", actually a gift, was added to the US National Debt. [It is unpayable. No? Just try to set up a feasible payment schedule by which to pay off $26T in a reasonable time period.]
But I digress" Since the fed, in actuality, no longer is trying to keep the real economy functioning without inflation, we are headed for a repeat of 2008, and the real economy be damned. (See Michael Hudson's book "Killing the Host")
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