As I understand it, the Fed has 3 tools for moving interest rates to combat inflation/unemployment: the discount rate, Fed Funds rate and open market operations.
I'm trying to understand how the yield curve is affected:
The Fed Fund rate is the overnight rate at which reserve balances, held by banks at the fed can be lent to each other. The shortest maturity that this treasury yield curve has is 1 month (no overnight). Are expectations regarding overnight fed funds rates reflected in the 1 month yields? I would suppose so, because if the government raises fed funds, their intentions are to influence and increase interest rates in general. Thoughts?
The discount rate is the interest the Fed charges other banks to borrow money. Does the 'discount rate' relate to the commercial paper listed here?. Am I correct in thinking that the discount rate refers to short term borrowing < 1year and that changes in the yield curve at maturities greater than 1 year may not be directly correlated to changes in fed funds or discount rates? (because these are not tools for influencing long term rates)
Finally I understand that changes in the curve at longer maturities may reflect the governments 'open market operations' and their buying and selling of US securities.
Any help solidifying this understanding would be much appreciated.
PART 2 TO THIS QUESTION HERE
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