federal funds rate

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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 ?
There is a strong positive relationship between the two measures, suggesting that increases in the fed funds rate can lower stock prices and raise the earnings yield, and reductions in the fed funds rate raise stock prices, reducing the earnings yield.
However, in order to obtain a reliable estimate of the future fed funds rate, one must make appropriate adjustments to the fed funds futures rate to take account of the biases and past movements of the fed funds rate.
Willmore acknowledged that the Fed's traditional practice has been to switch to a neutral bias after a move in the fed funds rate, but this time he thinks it's likely they'll stick with the tightening bias but not announce it.
This interpretation was recently reinforced, when both New York Times and Wall Street Journal editorials urged the Fed not to raise the fed funds rate at the September FOMC meeting even while noting that the important rates were the long rates.
The last time the Fed funds rate was this low was June of 2003.
This arrangement helps maintain, a steady supply of reserves--a desirable outcome for when the Fed sought to keep the fed funds rate neat a target rate.
Summary: As widely expected, the US Federal Reserve made a unanimous decision to keep the Fed Funds rate unchanged at the 0.
20 /PRNewswire/ -- After today's decision by the Federal Reserve to hold the target fed funds rate at 5.
short-term interest rates at extraordinary lows (at one point the Fed funds rate was set at 1 percent), financial institutions would borrow on the short end of the yield curve and buy the long end, guaranteeing a nice profit even before taking any risk.
Right now, the Fed funds rate has fallen below inflation in terms of the Consumer Price Index, causing negative real rates.
As the operating target of the FOMC, the fed funds rate is a benchmark for overnight lending rates and hence a key rate against which to hedge or even to speculate.