Federal Funds Rate

MarketWatch  Oct 4  Comment 
Fed's Lacker: Fed funds rate should be 1.5% or more
MarketWatch  Sep 28  Comment 
Remember when the Federal Reserve believed it would raise the Fed funds rate above 3% by the end of 2019? It wasn’t that long ago.
Clusterstock  Sep 21  Comment 
The Federal Reserve just announced that it intends to keep the fed funds rate in the same 0.25-0.5% range it has been targeting since December 2015. The central bank also gave us some idea about what its policy makers think is coming in the...
Benzinga  Aug 28  Comment 
Federal Reserve Chair Janet Yellen's Friday morning comments at Jackson Hole, in which she said the odds of a Federal Funds Rate hike have "strengthened", were typically vague. General consensus seems to be a December rate hike is still very...
Motley Fool  Aug 27  Comment 
One retailer surprises, one disappoints, and certain automakers receive some great news about driverless cars.
Forbes  Aug 26  Comment 
U.S. stocks reversed gains after inching up Friday morning as investors digested the comments of Fed’s chief Janet Yellen, signaling ‘gradual increases in the federal funds rate.’


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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