Federal Funds
From FXPedia
The Federal Funds transfer system is a facility that enables U. S. banks to lend surplus funds held in account at the U.S. Federal Reserve to other financial institutions with a cash shortage. All U.S. Federal Reserve member institutions are required to keep minimum cash reserves in their account, and when they fall below the mandated minimum, the institution can borrow from banks with a surplus. These loans are typically borrowed on an overnight basis and interest is charged at the Federal Funds Rate.
Financial institutions are eager to lend excess cash as funds held in Federal Reserve accounts do not earn interest. Therefore it is to the firm’s advantage to offer surplus funds in the overnight lending market in order to generate some revenue for their account.
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