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 ?
First and foremost, the working group has a mandate to identify and develop an adoption plan for a risk-free overnight rate that can serve as a basis for an alternative to the benchmarks currently used in the euro area.
On Thursday, the rupee lost nine paisa on the buying counter but retained its overnight rate on the selling counter.
To counter this, banks are proposing that the BSP raise its key overnight rate to counteract the inflationary effects of reducing the reserve requirement - a proposal that Espenilla remained noncommittal on.
For such a case, careful transition planning by market participants aims to minimize disruption to markets and consumers and to safeguard the continuity of contracts to the greatest extent possible, including contracts that currently reference a term rate rather than an overnight rate.
The overnight rate on deposits was maintained at minus 0.
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.
Following the improvements in the Interest Rate Corridor (IRC) framework in May 2015, SBP has ensured that the money market average overnight rate remains close to the newly introduced Target (Policy) Rate at 6.
BANKING AND CREDIT NEWS-October 23, 2014--Bank of Canada maintains 1% overnight rate target
M2 EQUITYBITES-October 23, 2014--Bank of Canada maintains 1% overnight rate target