Federal Funds Rate

Reuters  Dec 2  Comment 
A key overnight borrowing cost for U.S. banks reached its highest level since April 2013 on Monday after the Federal Reserve raised an interest rate on a test program aimed to hit its rate target when it decides to tighten policy, Fed data showed.
SeekingAlpha  Oct 6  Comment 
By Linus Wilson: Photo by Jeff Kubina, Creative Commons 2.0 The Federal Reserve plans to blow up bonds next year, and the market is not listening. Since 2012, the Fed has been telling investors where it expects the Fed funds rate to be at the...
SeekingAlpha  Sep 22  Comment 
By Doug K. Le Du: Savvy preferred stock buyers, looking for a glimpse of what the future of interest rates looks like, are used to watching Fed announcements regarding the federal funds rate. While doing so was fruitful during the Greenspan Fed...
SeekingAlpha  Sep 21  Comment 
By Market Raven: The Federal Reserve concluded its September meeting on monetary policy and produced multiple hints on where markets will go when compared to instant reactions. Equity markets took the statement as dovish and rallied while bonds...
SeekingAlpha  Sep 18  Comment 
By Dr. Duru: "There is no mechanical interpretation of what the term 'considerable time' means. And as I have said repeatedly, the decisions that the committee makes…will be data dependent…I again emphasize something I've said previously...
StreetInsider.com  Sep 17  Comment 
Market wrap for September 17th End of the Day: S&P 500 up 2.6 to 2,001.57; Dow Jones up 24.9 to 17,156.85; Nasdaq up 9.4 to 4,562.19 * The Federal Open Market Committee (FOMC) tapered its open-market activity from $25 billion per month down to...
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...


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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