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 ?
The Philippine central bank has announced that it has left its overnight rates unchanged.
Overnight rates of $1543 and $1489, respectively, position these two hotels in the sixth and eighth spots on the survey.
Five of seven economists in a Reuters survey had forecast the bank would leave its overnight rates unchanged.
If properly implemented, the placement of the cheap medium-term funds could bring the overnight rates closer to the middle of the policy rates corridor (c.
The reference index is the daily money market reference interest rate, which represents the weighted average of interbank overnight rates.
Central banks can promote alternative rates such as overnight rates and overnight index swaps (OIS) rates, the report said.
Overnight rates in the money market remained flat at 9.
Volunteer Corporate Credit Union's overnight rates varied on May 4 from 0.
Summary: Egypt banks continue for the second week its commitment about fixing interest rates despite CBE decision to cut overnight rates by 50 basis points.
69%, according to the British Bankers' Association - bringing overnight rates closer to the Bank of England's official 4.
In contrast, overnight rates in Japan remained close to 0 percent, the minimum that is feasible to achieve, from 2001 to 2006.
Some central banks also establish a floor for overnight rates by paying interest on the non-reserve deposits they hold.