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 ?
Mankiw [2001] concluded that inflation and the unemployment rate are important factors of fed funds rates in what is sometimes known as the Mankiw rule.
We can also test whether there is one-way causality (from the fed funds rates to inflation and the unemployment rate only) or two-way causality (inflation and the unemployment rate also Granger-cause fed funds rates).
According to Credit Suisse 1-Year forecasts, markets expect that the European Central Bank will cut rates by a cumulative 30 basis points in the coming year, while the US Federal Reserve is forecast to actually increase Fed Funds rates by 62bp through the same period.
Perfection is difficult to achieve in setting Fed funds rates.
While the Fed funds rate increased, long-term rates have decreased or remained stable.
The futures settlement price is calculated as 100 minus the monthly average of the overnight fed funds rates.
The fed funds rate is the interest rate paid on overnight loans made largely between banks.
The economy right now is reflecting the effects of the increases in Fed Funds rates of several quarters ago.
On average, futures rates overpredict future fed funds rates, and, depending on whether fed funds rates are falling or rising, the futures rate may consistently overestimate or underestimate the future fed funds rates.
We have reason to believe that the futures rate on average overpredicts the fed funds rate, and, over different phases of the business cycle, may systematically over- or underpredict the eventual fed funds rates.
As noted in the paper, regressions with separate fed funds rates and ten-year Treasury bond rates were run with lags up to fourteen quarters, and the sums of the coefficients on the bond rates were always positive.
But if the Fed has not already raised the fed funds rates, the situation is most likely to be a situation of increased demand.