Regarding the piece linked here, I don't think there is a better broad-brush explanation of what's up in the Fed Funds Market to be found.
From the Conversable Economist, January 14:
When the Federal Reserve conducts monetary policy, it announces a target for the "federal funds" interest rate. The implication is that if this specific rate rises or falls, it will affect other interest rates throughout the US economy; for example, like federal funds interest rate moves closely together with other key benchmark interest rates, like the interest rate for overnight borrowing on AA-rated commercial paper. However, the identity of the parties borrowing and lending in the "federal funds" market has changed dramatically since the Great Recession. John P. McGowan and Ed Nosal describe the shifts in "How Did the Fed Funds Market Change When Excess Reserves Were Abundant?" (Economic Policy Review, Federal Reserve Bank of New York, forthcoming).
As part of federal financial regulation, banks and certain other financial entities (to which we will return in a moment!) are required to hold a minimum amount of reserves at the Federal Reserve. Back before 2007, banks usually tried to minimize these reserves, because the Fed didn't pay them any interest for the funds in these reserve accounts. But sometimes it would happen, at the end of a business day, that a bank would realize that its deposits and withdrawals has created a situation where it didn't meet the minimum level of reserves. For a fundamentally healthy bank, this wasn't a problem. The bank with a slight deficiency of reserves would borrow from another bank that had ended the day with a slight excess of reserves. The "federal funds" interest rate was the rate paid for this lending, which was typically for a very short-term loan, like overnight. As McGowan and Nosal write:
Prior to the 2007 financial crisis, trading in the fed funds market was dominated by banks.1 Banks managed the balances—or reserves—of their Federal Reserve accounts by buying these balances from, or selling them to, each other. These exchanges between holders of reserve balances at the Fed are known as fed funds transactions.But during the Great Recession and its aftermath, the Fed used large-scale asset purchases, sometimes known as "quantitative easing," to conduct monetary policy. The Fed purchased several trillion dollars in US Treasury bonds and in mortgage-backed securities from banks. The Fed paid for these financial securities by putting money in the the reserve account that banks had with the Fed. In theory, banks could lend out these reserves. But the flood of quantitative easing money came so fast, and arrived in economic times that were so uncertain, that banks didn't in fact lend out most of the money. In addition, the Fed announced in October 2008 that it would start paying interest on banks reserves--which made the banks feel financially healthier.
As a result of this pattern of events, banks no longer tried to hold the minimum legally required level of reserves at the Fed. Instead, banks as a group were holding reserves several trillion dollars in excess of the legal requirement. As a result, banks no longer had any reason to borrow money in the federal funds market, and given that the Fed was now paying them interest on reserves, they didn't have any reason to lend money in that market, either.
Bottom line: When the Fed talked about conducting monetary policy to raise or lower the federal funds interest rate back in 2007 and earlier, it was talking about an interest rate in a market where banks were borrowers and lenders. But for the last decade or so, banks have little interest in borrowing and lending in the federal funds market. So when the Fed talks about raising or lowering the federal funds interest rate, what entities are actually doing the borrowing and lending in that market?
The main lenders in the federal funds market, as McGowan and Nosal explain, are the Federal Home Loan Banks....MORE
