Federal Funds Rate

MarketWatch  Feb 27  Comment 
The longer-run value of the federal funds rate is 3.5%, well below its historical level of 4.5%, said William Dudley, the president of the New York Fed, on Friday. The longer-run value is where the funds rate would encourage growth without...
Forbes  Feb 3  Comment 
It is generally assumed that a hike in the federal funds rate will cause a commensurate rise in level across the yield curve, but in reality, the yield curve evolution tends to be more flexible and ultimately to dictate returns.
MarketWatch  Jan 13  Comment 
The upward trajectory in the jobs market is more likely to continue if the Federal Reserve doesn't tighten monetary policy this year, Minneapolis Fed President Narayana Kocherlakota said Tuesday. Kocherlakota, who isn't a voting member of the...
MarketWatch  Dec 19  Comment 
In a statement, Philadelphia Fed President Charles Plosser explained why he dissented at Wednesday's Federal Open Market Committee, saying new language still stresses the passage of time, rather than being data specific. "While the expansion of...
Reuters  Dec 2  Comment 
A key overnight borrowing cost for U.S. banks reached its highest level since April 2013 on Monday after the Federal Reserve raised an interest rate on a test program aimed to hit its rate target when it decides to tighten policy, Fed data showed.
SeekingAlpha  Oct 6  Comment 
By Linus Wilson: Photo by Jeff Kubina, Creative Commons 2.0 The Federal Reserve plans to blow up bonds next year, and the market is not listening. Since 2012, the Fed has been telling investors where it expects the Fed funds rate to be at the...
SeekingAlpha  Sep 22  Comment 
By Doug K. Le Du: Savvy preferred stock buyers, looking for a glimpse of what the future of interest rates looks like, are used to watching Fed announcements regarding the federal funds rate. While doing so was fruitful during the Greenspan Fed...


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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