Moneyzine
Contents
/Personal Finance/Federal Funds Rate (Fed Funds Rate)

Federal Funds Rate (Fed Funds Rate)

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
September 25th, 2023
Advertiser Disclosure

Definition

The term federal funds rate refers to the rate of interest charged when financial institutions borrow funds from one another to meet their reserve requirement. The actual federal funds rate is a weighted average of all the transactions conducted by these banks.

Explanation

Also known as fed funds, federal reserve funds represent overnight borrowing between banks held by the Federal Reserve and necessary to meet their reserve requirements. If a depository institution has excess reserves, it is permitted to lend those funds to institutions that have a reserve deficiency. Typically, these unsecured loans are made for exactly one day and that is why they are sometimes referred to as overnight loans.

Also known as the fed funds rate, the interest rate on these loans is frequently used as an indicator of interest rate direction. The Federal Reserve Bank sets the interest rate on overnight borrowing and these rates are one of the levers the Federal Reserve uses to control both the supply of money (via the reserve requirement) and interest rates (via the fed funds rate).

The federal funds rate tracks closely with other short-term interest rates such as LIBOR. The rate is typically published by the Federal Reserve and is a weighted average of the transactions occurring on the market that same day.

Related Terms

Related Content

How to Make a Million Dollars in 10 Years
Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
March 26th, 2024
How to Apply Maslow’s Hierarchy to Your Money This Year
You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
March 27th, 2024
How to Tackle Multiple Savings Goals
When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
March 22nd, 2024
The Countdown to Early Retirement: 10 Expenses to Eliminate
Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
March 22nd, 2024
What’s Your One Page Financial Plan? Mapping out Your Future
“What’s your one page financial plan?” — This is the absolute best question that I’ve heard asked in a long time. Instead of talking about your hot stock pick or your fancy investment that shields you from paying taxes, I think it’s time for all of us to step back and ask ourselves the most intelligent question of all, “Why the heck do I care about money anyway??”
March 14th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.