I have always seen( since 1990s) that the Fed changes( cut/increase) interest rates in quarter point increment /decrements in USA that affect the world bond, stock market and borrowing rates, while I see world news where the ECB cuts by 10 points and India by unconventional 35 basis points and again.
So what economics data is used by the Fed, and what mathematical operation ( Monte Carlo ?) is done on the data, to arrive at quarter points result?.
I'm pretty sure it's just a policy that the Fed seems to follow. I know of no mechanical reason why they couldn't use more precise increments, but possibly for simplicity (or tradition) they choose to use more granular rates than other countries seem to.
Keep in mind that influencing interest rates is an inexact science. The Fed will set rates at a certain value with the goal to increase (or decrease) spending and borrowing in order to influence inflation and other key economic measures. So there's really not much benefit gained by issuing bonds at more fine-grained rates since the market can dictate an effective interest rate via the price that they decide to pay for the new bonds.
It's like having a volume knob on your stereo with 100 notches instead of 10 11. Having extra precision doesn't really buy you that much, and just makes it harder to decide what volume you want (you can more easily choose if 5 or 6 is better then you can 53 or 54).
According to A Model for the Federal Funds Rate Target at page 13
changes as small as 6.25 basis points were sometimes observed prior to 1990
Similarly, according to The Relationship Between the Federal Funds Rate and the Fed's Federal Funds Rate Target: Is It Open Market or Open Mouth Operations? at page 4:
In late 1989 the Fed began the practice of adjusting its funds rate target only in multiples of 25 basis points. Prior to that target changes were made in various amounts, with changes as small as 6.25 basis points.
From Marketplace (2022):
The central bank’s decision to adjust rates by multiples of a quarter percentage began more than 30 years ago, back in late 1989, under Fed Chair Alan Greenspan.
“They started doing a quarter point, and it worked OK because it was clear and it was infrequent and gradual,” [economist Gary] Richardson said.
If you’re going to do smaller increments, then you need to make more frequent decisions. The FOMC might think their current schedule of eight meetings a year is the right frequency.
More frequent meetings could be a hassle for staff, Richardson noted. The Fed has blackout periods a couple of weeks before its FOMC meetings during which employees can’t engage in certain financial transactions.
“If you increase the frequency of meetings, when are these people going to buy homes?” Richardson said. ...
[Economist Daniel] Thornton said that if the Fed feels a need to adjust rates, but doesn’t feel the need to move quickly, it’ll stick with the quarter-percentage change. If it’s raising those rates, getting too aggressive could scare the market.
Additional important point: Contrary to a comment above,
If the Fed switches away from quarter-point movements, it has to explain this switch. If non-quarter-point movements are clearly superior, then the Fed would probably switch. But as explained by Richardson above, the current system works OK (and a switch is not clearly superior). So why switch?
(A close analogy: Many central banks around the world have adopted the 2% inflation target. How did they determine that this nice round number is optimal? Why not 1.9% or 2.1%? Again, this 2% target was adopted starting with New Zealand in the early 1990s. It is to some extent arbitrary. Switching from 2% to 1.9% or 2.1% would needlessly confuse and unsettle markets and inflation expectations.)
Additional less important points:
The (extraordinary) exception was when interest rates were around zero or even negative c. 2014–22 (non-quarter-point-multiple and unusual interest rates of -0.10, -0.20, -0.30, -0.40, 0.05, 0.15, 0.30, and 0.40 were set).
For example, the NYSE only switched from a fractional to a decimal system in 2001. (Before that, prices were quoted in 1/4s, 1/8s, and 1/16s of a dollar.)
If Fed is really using statistical techniques, then it is impossible to come at an answer in multiple of 25 points unless they are targeting an objective, else they are using guess work and using tradition as the excuse. OLD quarter point system, could benefit the ultra rich, they should use the decimal points increase similar to stock market.
Doctors prescribe antibiotics or other medicine by weight very precisely in developed countries like USA, but in developing countries a child is given half of the antibiotics( where the child may be even 1/5 th weight of adult dose or 3/4th. So in Medical science we progressed, but not in banking.
With that said, there is no real reason for this kind of policy/tradition or simplicity.
Interest rate has a ripple effect across the entire U.S. economy and economist use gear analogy ( also ) then in cars more transmission are better, same is true with interest rates.
Ask big corporation how even a single point change affect: $9 trillion corporate debt
Or ask a student how does a single point affect , students collectively has 1.5 Trillion in debt.
Or ask a saver/retiree, who is not getting a fair safe return. Balance is key and it comes with precision. more granular interest rate change can generate efficiency.
