Federal Funds Rate

0.18 as of 2012-06-15

Unsecured loans of reserve balance kept at the Federal Reserve Banks by the financial institutions to meet their reserve requirements and to clear most of the financial transactions are commonly referred as federal funds. The federal funds rate is the interest rate at which the banks or other financial institutions’ borrow funds directly from Federal Reserve Bank. Usually the participants of federal funds market are the commercial banks, federal agencies, foreign banks in U.S and government securities dealers.

The federal funds market has a vital role in the execution of the monitory policy by providing the transfer of liquid funds among depository institutions. Banks whose reserve balance drops below the reserve requirement as fixed by the Federal Reserve's board of governors can use that money to correct their shortage. The federal board of directors of every reserve bank fix the discount rate every 14 days. The Federal uses the discount rate to synchronise the supply of available funds, which in turn has an impact on the inflation and overall interest rates. When more money is available, it is  more likely that the inflation will occur. As the interest rate moves up, it is more expensive to borrow from the Federal. This way the short term interest rates increase as the supply of available money lowers. However, lowering the rate has the opposite effect, bringing short-term interest rates down. Federal funds are considered to be the last resort for banks, which usually borrow from each other.

Moderately small financial institutions that accumulate reserves in excess of their requirements lend reserves overnight to large regional banks, money centres and to foreign banks operating in the United States. Federal agencies also lend idle funds in the federal funds market. Federal open market Committee (FOMC) operations vary the supply of reserve balances in the system. Thus by changing the supply of balances, the Federal can create upward or downward pressure on the federal funds rate.

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Historical Values

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