federal funds rate

(redirected from Fed Funds Rates)

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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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 ?
While the Fed recently made a hawkish-to-neutral policy shift in terms of forward guidance on Fed funds rates, tightening is stilling happening via the Fed's ongoing post-QE balance sheet shrinking.
There are several benefits of using the yield curve based on the 10-year Treasury and fed funds rates. Bernanke and Blinder (1992) demonstrated that the nominal level of the fed funds rate has consistently measured the monetary policy stance, suggesting that the policy stance is implicitly embedded in a yield curve including the funds rate at the short end.
* Before the 2007-09 financial crisis, the Fed's operating framework for monetary policy reflected a banking system in which the scarcity of reserves meant that small changes in reserves would affect fed funds rates.
Perfection is difficult to achieve in setting Fed funds rates. It is even more difficult in the current environment when longer-term rates are influenced so heavily by foreign capital inflows, which keep long-term credit conditions looser than the Fed desires.
The futures settlement price is calculated as 100 minus the monthly average of the overnight fed funds rates. For example, the July contract settlement price on May 7 of 98.905 implies a futures rate of 1.095 percent.
Fed dove Evans was also pretty relaxed on inflation risks, while still eying higher neutral fed funds rates. The 2-year yield eased from the 2.87% area to 2.85%, while the 10-year yield dipped from 3.175% to 3.15%.
[1999] suggestion, we include a lag of fed funds rates ([FFR.sub.t-1]) in the test equation.
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.
Gurkaynak Sack, and Swanson [2007] studied several different money market instruments--including term Fed funds rates, Fed funds futures, Eurodollar rates, Eurodollar futures, Treasury Bills, and commercial paper--to determine which is best for measuring monetary policy expectations.
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.
If you use the market-based probabilities of the number of Fed Funds rate hikes along with the current spread between the Fed Funds Rate and the year U.S.