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 ?
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1?
The FOMC expects that economic conditions "will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run," but that "the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Fed raised its Federal Funds Rate by 25 basis points on 14 May 2017, resulting in several central banks' across the GCC either raising, or maintaining their rates.
Further, results suggest the conventional mortgage interest rate responds symmetrically to changes in the effective federal funds rate in the long run.
Looking ahead, we continue to expect the evolution of the economy to warrant further gradual increases in the target range for the federal funds rate," she told the audience of the business leadership organization, according to (https://www.
The FOMC's decision to keep the federal funds rate unchanged at its meeting today confirms our view that U.
In December 2008, the Federal Open Market Committee (FOMC) lowered its target range for the federal funds rate to 0-25 basis points, effectively hitting the zero lower bound.
The last time the Fed raised the federal funds rate was in December, the first time since the 2008 financial crisis.
It also includes the Committee members' expectations for when the federal funds rate will be raised above the 0 to 0.
According to the conventional Taylor rule, the target federal funds rate should increase as inflation rises above target or GDP rises above the economy's potential level of GDP.
According to the textbook view, the Federal Reserve controls the federal funds rate by varying the supply of reserves available to the banking system.
A federal funds rate of one per cent would still represent highly accommodative policy.

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