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 ?
As in December, the March SEP showed that most FOMC participants believe that the federal funds rate will start to increase in 2015.
These modifications require using sophisticated estimation techniques to simplify the federal funds rate equation of the model.
The following day, the borrowing institution instructs the Federal Reserve to charge its account and to credit the account of the lending institution the principal amount plus interest, which is calculated using the interest rate set by the two institutions, known as the federal funds rate.
Rosen's models have the federal funds rate remaining at its current level into mid 2011.
Second, beginning with Taylor [2001], monetary economists have come to realize that expectations on the part of market participants also play a major role in how the Federal Reserve controls the federal funds rate.
In August, the Fed took the federal funds rate action with a 10-1 vote.
Given the forward-looking nature of the bond market, the effect of a change in the target federal funds rate on market interest rates depends crucially on whether or not the policy action is anticipated.
In addition to cutting the federal funds rate by a half point, the central bank also reduced its discount rate, the interest it charges in making direct loans to banks, by a half-point as well.
The CBOT launched the electronically-traded Binary options on the Target Federal Funds Rate contract on July 12, 2006.
Our forecast from a Mellon standpoint is for only a few more increases in the Federal Funds Rate this year.
The Federal Reserve will decide to boost its federal funds rate by one-quarter of a percentage point at each of its next three meetings, he predicted, bringing it to 4.
Olson, who preferred no change in the federal funds rate target at this meeting.

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