Federal Funds Rate

MarketWatch  Jun 13  Comment 
The Federal Reserve on Wednesday lifted a key U.S. interest rate to a range of 1.75% to 2% and signaled it will raise the cost of borrowing four times this year. Previously the central bank had forecast three rate hikes in 2018. The vote was 8-0....
Clusterstock  Jun 13  Comment 
Financial Times  Jun 4  Comment 
Peak in bond yields coincides mostly with that in the Federal Funds rate
MarketWatch  Apr 18  Comment 
New York Fed President William Dudley said Wednesday there "is still some distance to go" before monetary policy gets tight. He said he viewed the neutral real interest rate to be around 1%, which implies that the federal funds rate would need to...
MarketWatch  Mar 21  Comment 
The Federal Reserve on Wednesday lifted a key short-term U.S. interest rate and stuck to its prior forecast of three rate hikes in 2018, deciding for now to wait until next year to take a more aggressive approach. The central bank's policy-making...
Clusterstock  Mar 21  Comment 
Clusterstock  Dec 13  Comment 
The Fed announced it intends to raise the benchmark Fed funds rate to a range between 1.25% and 1.5%. The Federal Open Market Committee also released its quarterly "dot plot," showing where Fed members expect rates to go in the next few...
The Economic Times  Dec 11  Comment 
A December rise in the federal funds rate to a range of 1.25 per cent to 1.50 per cent has long been baked into Wall Street estimates
The Economic Times  Nov 21  Comment 
The Fed has raised the official federal funds rate four times since December 2015.
Clusterstock  Sep 20  Comment 
The Federal Reserve just announced , as widely expected, that it intends to hold the benchmark Fed funds rate in a range between 1% and 1.25%. The central bank also gave us some idea about what its policy makers think is coming in the...


The Federal Funds Rate (FFR) is the interest rate that banks pay to borrow federal funds. Federal law requires that banks hold a certain percentage (typically 10%) of the assets in their demand accounts (checking and savings accounts) with the Federal Reserve. These are referred to as federal funds. If a bank below its minimum federal funds reserve requirement, then it can borrow federal funds from another bank that has a surplus in its account.

How the Fed Funds Rate is Set

The Fed does not set the FFR directly. Instead it sets a nominal or desired rate and then carries out open market operations-- the buying and selling of government or other types of securities to influence money supply. When the fed sells large amounts securities to investors, it takes the proceeds from the sale and holds them, essentially removing money from the market and increasing interest rates. When it buys large amounts of securities, it injects money into the market lowering interest rates.

How the FFR affect banks

Loans involving Federal Funds are typically very short in duration, overnight. These loans are often a necessary part of a banks business. Banks depend on demand accounts for a substantial portion of the funding for the loans that they make. On any given day, a bank may lose more in deposits than it takes in or the demand for its loans may temporarily outstrip the assets that it has available, requiring it to draw upon the assets in its reserve account with the Fed. Borrowing funds from another banks reserve account is an expedient way for the bank to raise capital.

How the FFR affects the general economy

When the Federal Reserve raises the FFR it discourages banks from borrowing Federal Funds and in turn lowers the amount of money that banks are able/willing to lend. This has a broader dampening effect on the economy and can lead to slower economic growth. When the Fed lowers the FFR, it has the opposite effect.

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