The Fed just rigs the target rate with member bank colusion

The Fed, with almost no change in open market operations, had the effective rate and target rate follow each other all the way through this episode on the left. The one year rate bond, blue, is the real market rate. The effective rate is always ahead of the fed on the way up, only because the fed takes on quarter to catch up. But otherwise, both rates are tuned to the one year. Then, notice at the turn in 2006, the obne year bounced down and remained variable.  But with almost the same market operations, the effective and target remain.  The Fed and member banks simply agree before hand; and the rate they agree on is defined by the one year bond. If the Fed and Member banks cannot do no arbitrage rate setting between them, then forget about it, they will both be blind as bats.

There is only one member bank, Jack Lew and Goldman Sachs.  The other banks and the Fed simply wait for instructions. If the Fed and member banks were doing true price discovery, then that variance between the effective rate, the target and the one year would be about the same. What we have is mickey mouse from the MIT basket Weavers.

Here is a reference: http://www.newyorkfed.org/markets/omo/omo2007.pdf
  
here are some numbers.  The total float is %8 billion, and the banks stay within 25 basis points, YoY. Given 30 member banks, that comes to about 900k  per year in savings for that accuracy, and the trader to manage that will cost some 500k per year! No, this is not accurate price discovery, this is simply member banks awaiting instructions from Goldman Sachs who manages the debt flow for Jack Lew.