federal funds rate

(redirected from Fed Funds Rate)

Federal funds rate

The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction of US interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.

Federal Funds Rate

The interest rate at which fed funds are lent to a bank. Fed funds refer to the amount of money that a commercial bank in the United States has in excess of its reserve requirement that is deposited at the Federal Reserve Bank of their district. Federal funds are available for lending to other banks on an overnight basis. The FOMC sets a target for the federal funds rate, but the actual interest rates at which banks lend to one another are set by market forces. Generally speaking, however, when one speaks of the Fed raising or lowering "interest rates," this refers to the federal funds rate.

federal funds rate

The rate of interest on overnight loans of excess reserves made among commercial banks. Because the Federal Reserve has significant control over the availability of federal funds, the rate is considered an important indicator of Federal Reserve monetary policy and the future direction of other interest rates. A declining federal funds rate may indicate that the Federal Reserve has decided to stimulate the economy by releasing reserves into the banking system. Care is needed in using this indicator, however, because a declining rate may simply mean that the banks have weak demand for commercial loans and little need for borrowing reserves.
Case Study The Federal Reserve announced in early December 2001 it was lowering its target federal funds rate from 2.00% to 1.75%, the lowest level in 40 years. The quarter-point decline represented the 11th reduction in the benchmark short-term interest rate since the beginning of the year and established a target rate lower than the rate of inflation. The federal funds rate represents the rate that banks pay to borrow reserves from other banks. This rate influences other short-term rates, including the prime rate and the interest rate on U.S. Treasury bills. The aggressive Federal Reserve policy toward reducing interest rates was intended to stimulate a weak economy that had produced rising unemployment and business failures, especially following the September 11 terrorist attacks in New York City and Washington, D.C. The Federal Reserve has tools available to affect short-term interest rates but not long-term rates, which are influenced by inflation expectations of lenders and borrowers. Thus, an aggressive policy by the Federal Reserve to reduce short-term rates and stimulate the economy can actually result in higher long-term rates as investors become concerned that increased economic activity will be accompanied by rising inflation.
References in periodicals archive ?
As a result, the median fed funds rate path across these simple policy rules and forecasts now rises to 2.
If you use the market-based probabilities of the number of Fed Funds rate hikes along with the current spread between the Fed Funds Rate and the year U.
It is surreal that the midpoint Fed Funds rate is a mere 1.
The Fed iterated its 3% projection for the longer run fed funds rate.
The FOMC will leave the fed funds rate unchanged, leaving the next meeting in June as the most probable date for the next rate hike.
In a research note, BofA Merrill Lynch said that while the latest rate hike had been expected, the focus was on the median 'dot-plot' projection for the Fed funds rate which had shifted higher to show three rate hikes in 2017.
Keywords: Fed funds rate, surprises, equity markets, Treasury, foreign exchange
Yellen's comments immediately heightened expectations that the Federal Open Market Committee (FOMC), the Fed's policy board which she leads, will decide in its coming meeting to hike the fed funds rate.
He said, 'Given my current outlook, I believe that it would be appropriate to wait until 2017 to initiate lift off and then raise the fed funds rate at about 2 percentage points per year.
In September, when FOMC participants last estimated where they thought the "appropriate pace of policy firming" would leave the fed funds rate target at the end of next year, the answers were all over the lot.
com reporter Scott Gamm, reporter said, "While investors are watching for any clues from the Federal Reserve on a rate hike timeline, Fed Vice Chairman Stanley Fischer said in a Monday speech in New York that a rise in the fed funds rate will likely come before the end of 2015, but gave no further specifics.