Why does the federal funds rate mirror the short term treasury bond rates?
You are kind of approaching this all wrong. The federal funds rate and the short term treasuary (bills) rates are not actively set to match eachother by some entity. Its more about how everything in the market affects the other. The Federal Funds rate is set by institutions that loan eachother money, in the extreme short term of overnight. Think of the rate as the cost of money. If banks and other institutions could loan eachother money, in the short term, at 3.5%, then why would they buy a TBILL at 1.0% (other than it being a direct obligation of the US Goverment). Conversely, why would the US Goverment pay more than the going rate for a debt? They wouldn’t say, “the market wants 3.5%, we’ll give them 8.0%.” Even the goverment doesn’t throw around money like that.
