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 ?
Since the Committees December 2012 meeting, FOMC statements have indicated that exceptionally low federal funds rates "will be appropriate at least as long as the unemployment rate remains above 6.
11) This finding confirms the need for including past federal funds rates in a Taylor rule (as we do in equation (2)) in models like ours.
But this overabundance came in direct response to an increase in the demand for reserves, as reflected in firm federal funds rates prior to the addition of the reserves.
This article points out that discrete changes to the target federal funds rate are a clear source of predictable change in the monthly or quarterly average of the daily federal funds rates.
Thus, by affecting expectations about future federal funds rates (future short-term interest rates), the FOMC can affect current long term rates.
The Fed started raising federal funds rates on June 30 and followed with two more quarter-point increases on Aug.
Federal funds rates are projected at year-end to be 6%; three-month Treasury bills will maintain a 5.
By combining reserves and the federal funds rates as operating targets, the Fed could protect against both types of shock.
In the three reserve maintenance periods completed since the August meeting, adjustment plus seasonal borrowing averaged about $800 million, an amount inflated by circumstances that gave rise to sharply higher federal funds rates and unusually heavy adjustment credit extensions on the final day of each of these maintenance periods.
Daily federal funds rates since November 2010 fall loosely into a series of three trends, all of which can at least be partially explained by an event that has influenced market participants.
This means that changes in futures prices can be used to compute averages of expected changes in the federal funds rates, such as [m.
GRAPHICS OMITTED] Anticipated Target Federal Funds Rates (calculated January 27, 2004) February 1-2 meeting Target federal funds rate 2.

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