Federal Funds Rate

Clusterstock  Aug 26  Comment 
The Great Recession officially ended back in June 2009. We're now in the sixth year of the economic recovery and bull market. Are we overdue for another recession? "Recessions don’t happen because of a clock ticking," said Deutsche Bank's...
newratings.com  Aug 22  Comment 
BRUSSELS (dpa-AFX) - The U.S. dollar gained ground against the other major currencies on Friday, as the Federal Reserve Chair Janet Yellen warned that rate hikes could come sooner than expected if the the U.S. economic recovery is sustained. "If...
MarketWatch  Aug 20  Comment 
The Federal Reserve has agreed to use interest rates on excess reserves as its main tool to set the federal funds rate and the bank plans to target a range instead of a precise number when it eventually raises rates, according to minutes of its...
SeekingAlpha  Aug 19  Comment 
By Harlan Levy: Economist Nicholas Perna is the economic adviser to Webster Financial Corp. and managing director of consulting firm Perna Associates. He has also been a visiting lecturer at Yale University. Harlan Levy: Is the market...
SeekingAlpha  Jul 28  Comment 
By Scott Sumner: David Andolfatto is a very knowledgeable monetary policy blogger, and here he interviews Michael Woodford, perhaps the world's leading monetary theorist. I'll just focus on one issue: Andolfatto There is a...
newratings.com  Jul 15  Comment 
WASHINGTON (dpa-AFX) - The Federal Reserve may raise interest rates sooner than expected if the recovery in the U.S. labor market is sustained, Fed Chairman Janet Yellen will tell Congress Tuesday morning. "If the labor market continues to...
Jutia Group  Jul 11  Comment 
What led to the 2008/2009 stock market and real estate crash and subsequent Great Recession can be attributed to one factor: the sharp rise in interest rates that preceded that period. In May of 2004, the federal funds rate, the bellwether rate...
SeekingAlpha  Jun 19  Comment 
Perhaps one of the most influential books I've read over the last several years is "The Era of Uncertainty", which was co-authored by Francois Trahan and voted as the #1 Portfolio Strategist in 2013 by Institutional Investor. In the book, Francois...
SeekingAlpha  Jun 16  Comment 
By Edward Hugh: "I now suspect that the kind of moderate economic policy regime...... that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable." Paul...
Reuters  May 30  Comment 
Don't count on the U.S. Federal Reserve to go back to a numerical bulls-eye to aim at when it finally decides to raise interest rates. A target range for the federal funds rate may well be here to stay, at least for the foreseeable future.


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.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki