Federal funds

Federal funds

Noninterest-bearing deposits held in reserve for depository institutions at their district Federal Reserve Bank. Also, excess reserves lent by banks to each other.

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federal funds

Reserve balances that are maintained by commercial banks in the Federal Reserve System at amounts above what is required. These excess reserves are available for lending to other banks in need of reserves. Although the loans are usually made on a single-day basis, they may be renewed. The availability of and the rate paid for federal funds are important indicators of Federal Reserve policy; hence, both are watched closely by financial analysts in order to forecast changes in the credit markets. Also called fed funds.

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Federal funds. When banks have more cash than they're required to in their reserve accounts, they can deposit the money in a Federal Reserve bank or lend it to another bank overnight.

That money is called federal funds, and the interest rate at which the banks lend to each other is called the federal funds rate.

The term also describes money the Federal Reserve uses to buy government securities when it wants to take money out of circulation. It might do this to tighten the money supply in the hope of forestalling an increase in inflation.