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In the United States the
federal funds rate is the
interest rate at which private depository institutions lend balances (
federal funds) at the Federal Reserve to other depository institutions overnight.
Mechanism
- U.S. banks and thrift institutions are obligated by law to keep certain non-interest-bearing Reserve requirement with the Fed (or to keep an equal amount of vault cash, but this imposes risks and costs). The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank's demand accounts.
- Example: A particular U.S. depository institution, in the normal course of business, issues a loan, which dispenses money, reducing that bank's reserves. If its reserve level falls below the legally required level, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank will borrow the requisite funds from another bank that has a surplus in its Fed reserves. The interest rate that the first bank will pay to the second bank in return for borrowing the funds is negotiated between the two banks, and the weighted average of this rate across all banks is the effective federal funds rate.
The
nominal rate is a target set by the governors of the Federal Reserve, which they enforce primarily by
open market operations (usually, the buying and selling of money through repurchase agreements on bonds). When the media refer to the Federal Reserve "changing interest rates," this nominal rate is almost always meant. The target is generally a range, as the Federal Reserve cannot set an exact value through open market operations.
Another way banks can borrow funds to keep up their required reserves is by getting a loan from the Federal Reserve itself at the
Federal_Reserve#Federal_funds_rate_and_discount_rate. These loans are very short term and rare, as they are subject to audit by the Fed and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.
The federal funds rate is decided at
Federal Open Market Committee (FOMC) meetings. Depending on their agenda and the economic conditions of the U.S., the FOMC members will either increase, decrease, or leave the rate unchanged. It is possible to infer the market expectations of the FOMC decisions at future meetings from the CBOT (
Chicago Board of Trade) Fed Funds futures contracts, and these probabilities are widely reported in the financial media.
Historical rates
See also
External links
- Fed Funds Rate Theories from Great Depression, R. L. Norman, Jr.
- Federal Reserve Web Site: Federal Funds Rate Historical Data (including the current rate), Monetary Policy, and Open Market Operations
- Notes and Theory on How Federal Reserve Works as Part of Long Wave Activity and Creative Destruction, R. L. Norman, Jr.
- MoneyCafe.com page with Fed Funds Rate and historical chart and graph
- Historical data (since 1954) comparing the US GDP growth rate versus the US Fed Funds Rate - in the form of a chart/graph
In the
United States the
federal funds rate is the interest rate at which private depository institutions lend balances (federal funds) at the
Federal Reserve to other depository institutions overnight.
Mechanism
- U.S. banks and thrift institutions are obligated by law to keep certain non-interest-bearing Reserve requirement with the Fed (or to keep an equal amount of vault cash, but this imposes risks and costs). The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank's demand accounts.
- Example: A particular U.S. depository institution, in the normal course of business, issues a loan, which dispenses money, reducing that bank's reserves. If its reserve level falls below the legally required level, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank will borrow the requisite funds from another bank that has a surplus in its Fed reserves. The interest rate that the first bank will pay to the second bank in return for borrowing the funds is negotiated between the two banks, and the weighted average of this rate across all banks is the effective federal funds rate.
The
nominal rate is a target set by the governors of the Federal Reserve, which they enforce primarily by open market operations (usually, the buying and selling of money through repurchase agreements on bonds). When the media refer to the Federal Reserve "changing interest rates," this nominal rate is almost always meant. The target is generally a range, as the Federal Reserve cannot set an exact value through open market operations.
Another way banks can borrow funds to keep up their required reserves is by getting a loan from the Federal Reserve itself at the
Federal_Reserve#Federal_funds_rate_and_discount_rate. These loans are very short term and rare, as they are subject to audit by the Fed and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.
The federal funds rate is decided at
Federal Open Market Committee (FOMC) meetings. Depending on their agenda and the economic conditions of the U.S., the FOMC members will either increase, decrease, or leave the rate unchanged. It is possible to infer the market expectations of the FOMC decisions at future meetings from the CBOT (Chicago Board of Trade) Fed Funds futures contracts, and these probabilities are widely reported in the financial media.
Historical rates
See also
External links
- Historical Data: Effective Federal Funds Rate (interactive graph) from the Federal Reserve Bank of St Louis
- Fed Funds Rate Theories from Great Depression, R. L. Norman, Jr.
- Federal Reserve Web Site: Federal Funds Rate Historical Data (including the current rate), Monetary Policy, and Open Market Operations
- Notes and Theory on How Federal Reserve Works as Part of Long Wave Activity and Creative Destruction, R. L. Norman, Jr.
- MoneyCafe.com page with Fed Funds Rate and historical chart and graph
- Historical data (since 1954) comparing the US GDP growth rate versus the US Fed Funds Rate - in the form of a chart/graph
Intended Federal Funds Rate
Lists interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions.
Federal funds rate - Wikipedia, the free encyclopedia
In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to ...
Federal Funds Rate
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This graph of the different Federal Funds rate over a number of years is presented by HSH Associates, Financial Publishers.
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Federal Funds Rate Data - Federal Reserve Bank of New York
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Definition of federal funds rate in the Financial Dictionary - by Free online English dictionary and encyclopedia. What is federal funds rate? Meaning of federal funds rate as a ...
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Federal funds rate - definition of Federal funds rate - The interest rate that banks charge each other for the use of Federal funds. It changes daily and is a sensitive indicator ...
Curious Cat Investing Dictionary Glossary Encyclopedia - Definitions ...
Your online library of investment articles, resources and dictionary of investing terms. ... curiouscat.com > Books > Investment > Library > Dictionary > Fed Funds Rate
Explaining and Forecasting the US Federal Funds Rate >> Palgrave.com ...
Palgrave Macmillan is a global academic publisher, serving learning and scholarship in higher education and the professional world
