Federal Funds Rate

QUOTE AND NEWS
Financial Times  Apr 4  Comment 
Most analysts agreed the Federal Reserve would maintain the status quo of gradual removal of monetary stimulus, while keeping the main Fed funds rate at close to zero for an extended period
Financial Times  Apr 2  Comment 
This pattern is the opposite of the 2004-06 tightening, when the Fed funds rate rose by 525 basis points but the long-term rate barely moved
Wall Street Journal  Mar 23  Comment 
The market struggled after Janet Yellen signaled the federal funds rate could climb as soon as April 2015.
Forbes  Mar 20  Comment 
Investors have been wanting to know when Federal Reserve will start raising its target for the federal funds rate. And in the past, the Federal Reserve has yet to give a concrete answer instead stating:  “it likely will be appropriate to...
Financial Times  Mar 20  Comment 
Fed officials upgraded their rate expectations, with more of them now forecasting the federal funds rate will be at least 1% by the end of 2015
TheStreet.com  Mar 19  Comment 
NEW YORK (TheStreet) -- Federal Reserve Chairwoman Janet Yellen holds her first press conference as head of the central bank as reporters hope to draw more details about tapering and raising the federal funds rate. Click here to follow TheStreet's...
MarketWatch  Jan 29  Comment 
A Jan. 29 story by MarketWatch incorrectly described the timing of fed funds rate hike projections. The story has been corrected.
MarketWatch  Dec 23  Comment 
Treasury prices retreated Monday, as the market continued to shift its focus toward the Federal Reserve’s target policy rate.
MarketWatch  Dec 23  Comment 
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said he believes the central bank will begin raising its target policy rate in early 2015. Speaking Monday on CNBC, Lacker said his forecast for the trajectory of the fed funds...
MarketWatch  Dec 6  Comment 
Fed funds futures were little changed after a jobs report showing better-than-expected labor market growth. The futures contracts, which are thinly traded on the Chicago Mercantile Exchange, move in price based on the expected future path of the...




 
TOP CONTRIBUTORS


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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