Federal Funds Rate

Yahoo  Aug 19  Comment 
Only one Fed policymaker was ready to vote for a rate hike at the central bank's July 28-29 policy meeting, while some others "viewed the economic conditions for beginning to increase the target range for the federal funds rate as having been met...
Yahoo  Aug 5  Comment 
Traders have never been more convinced of a September rate hike by the Federal Reserve. The Fed has held its target for the federal funds rate at virtually zero since December 2008 to bolster economic growth.
Benzinga  Jul 24  Comment 
- heard from various market sources © 2015 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
MarketWatch  Jul 15  Comment 
In a speech on Wednesday, Cleveland Fed President Loretta Mester called for an interest-rate hike but said the timing of it wasn't important. "My own assessment is that the economy can handle an increase in the fed funds rate. A small increase in...
Forbes  Jul 13  Comment 
If there is going to be a small step by the Fed in September, the coming week’s Yellen testimony to Congress (the bi-annual Humphrey Hawkins report) is the Chair’s opportunity to set the market straight on the odds. Since the year began the...
MarketWatch  Jul 10  Comment 
Federal Reserve Chairwoman Janet Yellen on Friday said she saw signs the economy was improving and expects a rate hike will be needed this year. "I expect that it will be appropriate at some point later this year to take the first step to raise...
Clusterstock  Jun 17  Comment 
The Federal Reserve just released their most recent statement on monetary policy. In addition to the statement, the Federal Open Market Committee (FOMC) released its projections on where they think the economy will be heading in the next few...
MarketWatch  May 19  Comment 
Fed policy makers’ biggest fear isn’t mistiming the first increase in the Fed funds rate since 2006 — it’s the possibility that the shaky U.S. economic recovery dies on the vine before they can even begin to lift rates.


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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