Federal Funds

What are 'Federal Funds'

Federal funds are excess reserves that commercial banks deposit at regional Federal Reserve banks. Federal funds can then be lent to other commercial banks with insufficient reserves. These loans are made at a relatively low interest rate, called the federal funds rate or overnight rate, and they typically have an extremely short duration: overnight. Federal funds help commercial banks meet their daily reserve requirements. Banks are required to maintain a certain level of reserves based on the amount of customer deposits they are responsible for.

BREAKING DOWN 'Federal Funds'

When federal funds are freely available for borrowing, credit is easy to obtain and the credit market is considered healthy. When federal funds are difficult to obtain, credit becomes tight. If credit is too freely available, the Federal Reserve may buy back some of the government bonds it has issued to decrease the money supply and try to prevent inflation. The federal funds rate is closely related to short-term interest rates in the broader market.

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RELATED FAQS
  1. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  2. What are the implications of a low Federal Funds Rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  3. How does the Federal Reserve's set discount rate affect my personal finances?

    Discover how the Federal Reserve implements its chosen monetary policy through its discount rates, and how these actions ... Read Answer >>
  4. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  5. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  6. How does the stock market react to changes in the Federal Funds Rate?

    Learn how the stock market reacts to changes in the federal funds rate. The fed funds rate is the overnight rate at which ... Read Answer >>
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