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 Monetary Authority of Singapore (MAS) has said that it has formed a committee to oversee an industry-wide interest rate benchmark transition from the Singapore dollar (SGD) Swap Offer Rate (SOR) to the Singapore Overnight Rate Average (SORA).
But, because long-term loans are like a series of short-term loans, movements in the overnight rate (especially those seen as long-lasting) tend to move long-term rates.
Banks have been fined $9B for trying to rig Libor, a measure of borrowing costs among banks, and the Bank of England has established the SONIA overnight rate for use in contracts.
Summary: The overnight rate remained stable at 5.0% this week following the Central Bank of LebanonEe's last week decision to lift LP time deposit rates.
On March 29, the committee set the overnight rate and the overnight lending rate at 16.75 percent and 17.75 percent, respectively.
"Bank of India has revised upward marginal cost-based lending rate for one-year at 8.50 percent while overnight rate up by 10 bps at 7.90 percent," it said.
'The longer-dated [interest rates] rates have already moved up,' he said, hinting that BSP's key overnight rate would also follow the uptrend soon.
On Thursday, the rupee lost nine paisa on the buying counter but retained its overnight rate on the selling counter.
During 2016, while QIBOR and overnight rate showed similar trend, the overnight rate generally ruled above the QIBOR rate during the first half and below it during most part of the second half of the year.
A bank spokesman said: "RBS has applied a 0% floor to the overnight rate charged for deposits required by clearing houses for futures trades.
Besides signaling the monetary policy stance, the overnight rate also helps in anchoring the term structure of interest rates.
The decision will increase the overnight rate to is 10.75% and the loan rate to 11.75%.