Federal Funds Rate

MarketWatch  Jul 26  Comment 
The Federal Reserve took a step toward reducing its $4.5 trillion balance sheet, as the Federal Open Market Committee statement said its previously announced drawdown program would begin "relatively soon" instead of simply "this year." In a...
MarketWatch  Jul 11  Comment 
Federal Reserve Gov. Lael Brainard on Tuesday indicated she supports the central bank beginning to reverse its $4.5 trillion balance sheet but not necessarily more rate hikes after that. "If the data continue to confirm a strong labor market and...
Clusterstock  Jun 15  Comment 
The Federal Reserve on Wednesday lifted its fed funds rate by 25 basis points to a range of 1% to 1.25%. It marked the fourth interest-rate hike since the financial crisis. While the rate hike and the Fed's plan to shed some of the assets on its...
247WallSt  Jun 14  Comment 
Janet Yellen and the Federal Open Market Committee have confirmed what the market was bracing for (or hoping for) — a Fed Funds rate hike. What is also now on the table is that the Federal...
Clusterstock  Jun 14  Comment 
The Federal Reserve just announced, as widely expected, that it intends to raise the benchmark Fed funds rate to a range between 1% and 1.25%, up from the 0.75% to 1% range established in March. The central bank also gave us some idea about...
Motley Fool  Apr 3  Comment 
The average interest rates for most types of home loans held steady, despite expectations that they were going to rise.
Motley Fool  Mar 22  Comment 
Other than jumbo loans, the good news just keeps on coming for would-be home buyers, despite the Federal Reserve's recent hike to its benchmark 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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