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.
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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.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
To put this into perspective, the near one percent fed funds rate implied by this pricing is less than half of the level that prevailed just about a month ago prior to the July Federal Open Market Committee meeting.
The target for the fed funds rate was adjusted down by 25 basis points (bps) to 2-2.25 percent.
Summary: New York [USA], Aug 1 (ANI): The cut in US Fed funds rate is credit negative for American banks, applying renewed pressure on net interest margins (NIMs) and profitability that could stimulate further consolidation of the sector, Moody's Analytics said on Thursday.
Although the anticipated reduction of the Fed funds rate will impact our investment income, given current business conditions and the efficiency of our operations, we expect to deliver strong financial results in the second half of the year."
The Fed Funds rate, the differential between EM and developed-market (DM) GDP growth, global risk appetite (proxied by the VIX measure of equity market volatility) and the US dollar are key global drivers of EM capital flows.
That's what the Federal Reserve is attempting to do as the fed funds rate inches closer to the top of the central bank's target range.
Abstract This paper proposes a new framework that identifies a threshold between the fed funds rate and the 10-year Treasury yield and, when the threshold is breached, the risk of a recession in the near future is significant.
Bank Indonesia governor Perry Warjiyo said, 'When we know that the Fed Funds rate will increase, we cannot wait.
The New York Fed's Open Market Trading Desk ("the Desk") carried out OMOs on a daily basis to keep the overnight fed funds rate close to its target.
Twenty-six of the 27 economists also price in another rate hike in December, leaving the Fed Funds Rate at 2.25-2.50 percent by the year end.
The rise in three month Libor (and thus borrowing costs for leveraged bond and real estate punters, let alone debt addicted governments and corporates) presages the rise in the Fed Funds rate. As inflation overshoots the Fed target levels, the FOMC statement will get more hawkish and the Fed Funds rate could easily rise 150 basis points from current levels before the Federal Reserve achieves a 'neutral' level.