Federal Funds

A A A

DEFINITION

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.

INVESTOPEDIA EXPLAINS

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.


RELATED TERMS
  1. Federal Reserve Bank

    The central bank of the United States and the most powerful financial institution ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at ...
  3. Same-Day Funds

    Money that can be transferred or withdrawn the same day that it is deposited. ...
  4. Fed Balance Sheet

    A breakdown of the assets and liabilities held by the Federal Reserve. This ...
  5. Euro Feds

    A federal wire transmission advancing funds in Eurodollars from a U.S. bank ...
  6. Federal Reserve System - FRS

    The central bank of the United States. The Fed, as it is commonly called, regulates ...
  7. Open Market Operations - OMO

    The buying and selling of government securities in the open market in order ...
  8. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold in reserve against ...
  9. Ben Bernanke

    The chairman of the board of governors of the U.S. Federal Reserve. Bernanke ...
  10. Federal Debt

    The total amount of money that the United States federal government owes to ...
Related Articles
  1. Basics Of Federal Bond Issues
    Bonds & Fixed Income

    Basics Of Federal Bond Issues

  2. Interest Rates And Your Bond Investments
    Investing Basics

    Interest Rates And Your Bond Investments

  3. What does a cut in interest rates mean ...
    Investing

    What does a cut in interest rates mean ...

  4. The Federal Reserve
    Economics

    The Federal Reserve

  5. Money Market Accounts vs. Savings Accounts
    Savings

    Money Market Accounts vs. Savings Accounts

  6. How Banks Set Interest Rates On Your ...
    Investing Basics

    How Banks Set Interest Rates On Your ...

  7. Questions For U.S. Stock ETF Bulls
    Economics

    Questions For U.S. Stock ETF Bulls

  8. The Taylor Rule: An Economic Model For ...
    Economics

    The Taylor Rule: An Economic Model For ...

  9. This is What the Fed’s Monetary Policy ...
    Economics

    This is What the Fed’s Monetary Policy ...

  10. What to do When the Market Doesn’t Believe ...
    Investing

    What to do When the Market Doesn’t Believe ...

comments powered by Disqus
Hot Definitions
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  2. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  3. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  4. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  5. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  6. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
Trading Center