Federal Funds Rate

QUOTE AND NEWS
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.
newratings.com  May 18  Comment 
WASHINGTON (dpa-AFX) - Federal Reserve Bank of Chicago President Charles Evans said it will not be appropriate to start raising the fed funds rate until sometime in early 2016. Although economic activity appears to be on a solid, sustainable...
Benzinga  Apr 22  Comment 
One of the biggest questions in the financial markets this year is whether the Federal Reserve will raise short-term interest rates from near zero. And if so, when? The Fed has a tool for tinkering with short-term rates. It’s called the...
Yahoo  Apr 22  Comment 
U.S. economic growth is set to rebound in the second quarter, but a strong dollar could slow momentum and push the first interest rate hike from the Federal Reserve to later this year, a Reuters poll found. The survey forecast the fed funds rate...
Yahoo  Apr 20  Comment 
The U.S. federal funds rate , which banks charge each other to borrow their excess reserves, averaged 0.13 percent on Friday for a fourth straight day, Fed data released early Monday showed. The fed funds ...




 
TOP CONTRIBUTORS


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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