Federal Funds Rate
From FXPedia
Federal Funds Rate
Because it can be difficult to judge precisely the funds necessary to settle transactions and still maintain the required minimum, institutions commonly find themselves in either a surplus or deficit position. To address this difficulty, a system of intra-bank transfers has been developed whereby institutions can transfer funds as needed. In short, banks with a surplus can transfer funds to a bank with a deficit. These funds are generally loaned on an overnight basis and the fee associated with these transfers is referred to as the federal funds rate.
The Federal Open Market Committee (FOMC) - and by extension, the Federal Reserve - has a target that it wants to maintain for the Federal Funds rate. When news reports state that the Fed has lowered or raised interest rates, it is the Federal Funds Target Rate to which they are referring. While the Fed does not directly set the overnight Federal Funds rate, it uses its ability to control the money supply to influence the overnight rate.
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