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 Base Rate is currently set at either 50 basis points above the lower end of the prevailing target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBORs), whichever is the higher.
The federal funds rate is the interest rate at which banks make overnight loans to other banks to maintain the reserve requirements set by the Federal Reserve.
Accordingly, one could infer the normal rate from the average federal funds rate over time.
federal funds rate, firms with a 1 percentage point higher borrowing cost than their country average enjoy a 1 percent higher increase in loans than that afforded to average borrowers.
Credit cards -- Credit card interest rates are variable and are directly tied to the movement of the federal funds rate. Specifically, most credit card interest rates are based on the U.S.
The Fed raised the target range for the federal funds rate to one to 1-1/4 per cent.
As such, the federal funds market has evolved into a market in which the FHLBs lend to foreign banks, which then arbitrage the difference between the federal funds rate and the rate on IOER.
During the period from 1960 to 2007, the nominal federal funds rate averaged about 6 percent, with a standard deviation of 31/4 percentage points.
Key Words: Thirty-year Conventional Mortgage Interest Rate, Effective Federal Funds Rate, Asymmetric Adjustment, Pass-Through
"The FOMC's decision to keep the federal funds rate unchanged at its meeting today confirms our view that U.S.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.
The influential federal funds rate, or the interest rate banks charge one another for overnight lending, will remain at a target range of 0.25 to 0.5 percent.

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