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5:00The Yield Curve as a Machine: How 8 Fed Words Reprice Every Bond on Earth
The Fed only sets one rate, for one night, for US banks. Yet a single sentence from its chair can shave billions off German pension funds and Japanese mortgages within seconds. Here is the gearing that makes that possible.
The Federal Reserve directly controls almost nothing. The FOMC (which meets eight times a year) sets a *target range* for the federal funds rate, the rate at which US banks lend reserves to each other overnight. That is one rate, one currency, one night. Everything else, the 2-year, the 10-year, the German Bund, the corporate bond your pension fund holds, is *repriced by the market* the moment expectations about that overnight rate change. The yield curve is the machine that does the repricing.
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