In macroeconomics, the interest rate plays a crucial role in delivering an equilibrium on the assets market by equating the demand and supply of funds. The two most prominent interest rates widely featured are the federal funds rate and the London Interbank Offered Rate (LIBOR). The federal funds rate is mostly relevant for the U.S. economy, as it represents the rate at which highly creditworthy U.S. financial institutions trade balances held at the Federal Reserve, usually overnight. The federal funds rate is set by the U.S. Federal Reserve. LIBOR represents a benchmark rate that leading global banks charge each other for short-term loans. Unlike the federal funds rate, LIBOR is determined by the equilibrium between supply and demand on the funds market, and it is calculated for five currencies and different periods ranging from one day to one year.
Federal Funds Rate
The federal funds rate is one of the most important interest rates for the U.S. economy, as it affects broad economic conditions in the country, including inflation, growth, and employment. The Federal Open Market Committee (FOMC) sets the target for the federal funds rate and achieves the preset rate through open market operations. The federal funds rate is set in U.S. dollars and is typically charged on overnight loans.
London Interbank Offered Rate
LIBOR is an important rate used worldwide by financial institutions to determine the interest rate to be charged on various loans. LIBOR is based on five currencies: the U.S. dollar, euro, pound sterling, Japanese yen, and Swiss franc. There are typically seven maturities for which LIBOR is quoted: overnight, one week, and one, two, three, six, and 12 months. The most popular LIBOR rate is a three-month rate based on the U.S. dollar.