What is the Federal Funds Rate?
The federal funds rate is the rate that a Federal Reserve District bank charges another bank for the overnight loans needed to meet the reserve requirements. The Fed sets the requirements and is a certain amount of funds reserved against the deposit of their customers. This money is required to be in the vault or in the closest Federal Reserves Bank.
The federal funds rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. The rate may vary from depository institution to depository institution and from day to day. Why does the Fed increase or decrease the federal funds rate? The Federal Reserve Act specifies that the FOMC should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” At each meeting, the FOMC closely examines a number of indicators of current and prospective economic developments. Then, cognizant that its actions affect economic activity with a lag, it must decide whether to alter the federal funds rate. A decrease in the federal funds interest rate stimulates economic growth, but an excessively high level of economic activity can cause inflation pressures to build to a point that ultimately undermines the sustainability of an economic expa
The Federal Funds Rate is the rate of interest that is employed when affiliated banks lend money to the Federal Reserve of the United States. The rate is normally applied to very short-term loans that are often repaid the same day of issue or the following business day. Excess fund reserves are the source of the funds used to back the short-term loan to the Federal Reserve. Extending quick loans using the Fed Funds Rate differs somewhat from the process of lending funds to the consumer market. First, there is a cap on the amount of funds that the bank may lend to the Federal Reserve. This is determined by the current balance of surplus funds in the possession of the bank on a given day. This provision helps to ensure that the bank is not hindered from conducting business, even for a single business day. Second, there is no qualification process that the Federal Reserve must go through in order to qualify for the short-term loan. It is understood that the loan will be repaid, along with
