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Federal Funds

Federal Funds

What are 'Federal Funds'

Federal funds, often referred to as fed funds, are excess reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks; these funds can be lent, then, to other market participants with insufficient cash on hand to meet their lending and reserve needs. The loans are unsecured and are made at a relatively low interest rate, called the federal funds rate or overnight rate, as that is the period for which most such loans are made. Next Up Federal Discount Rate Federal Reserve Credit Reserve Requirements Eurodollar

Explaining 'Federal Funds'

Fed funds help commercial banks meet their daily reserve requirements, which is the amount of money that banks are required to maintain at their regional Federal Reserve. Reserve requirements are based on the volume of customer deposits that each bank holds.

Overnight Markets

The fed funds market operates in the United States and runs parallel to the offshore eurodollar deposit market. Eurodollars are also traded overnight and the interest rate is virtually identical to the fed funds rate, but the transactions must be booked outside of the United States. Multinational banks often use branches domiciled in the Caribbean or Panama for these accounts, even though the transactions may be executed in U.S. trading rooms. Both are wholesale markets with transactions ranging from $2 million to well over $1 billion.

Interest Rates

The Federal Reserve uses open market operations to manage the supply of money in the economy and adjust short-term interest rates. This means that the Fed buys or sells some of the government bonds and bills it has issued; this increases or decreases the money supply and, thus, lowers or raises short-term interest rates. Open Market Operations are carried out by the Federal Reserve Bank of New York.

Market Participants

The participants in the fed funds market include U.S. commercial banks, U.S. branches of foreign banks, savings and loan organizations, and government-sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Association (Freddie Mac), as well as securities firms and agencies of the federal government.


Further Reading

The microstructure of the federal funds marketThe microstructure of the federal funds market
onlinelibrary.wiley.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Interest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target periodInterest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target period
www.tandfonline.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Predicting monetary policy with federal funds futures pricesPredicting monetary policy with federal funds futures prices
onlinelibrary.wiley.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Systemic illiquidity in the federal funds marketSystemic illiquidity in the federal funds market
pubs.aeaweb.org [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Announcement effects of the federal funds rate changes on exchange traded funds and bond yieldsAnnouncement effects of the federal funds rate changes on exchange traded funds and bond yields
pennstate.pure.elsevier.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

The response of the conventional mortgage rate to the Federal Funds rate: Symmetric or asymmetric adjustment?The response of the conventional mortgage rate to the Federal Funds rate: Symmetric or asymmetric adjustment?
www.tandfonline.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Interbank payments and the daily federal funds rateInterbank payments and the daily federal funds rate
www.sciencedirect.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Banks as monitors of other banks: Evidence from the overnight federal funds marketBanks as monitors of other banks: Evidence from the overnight federal funds market
www.jstor.org [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

Asymmetric effects of federal funds target rate changes on S&P100 stock returns, volatilities and correlationsAsymmetric effects of federal funds target rate changes on S&P100 stock returns, volatilities and correlations
www.sciencedirect.com [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …

A model of the federal funds rate targetA model of the federal funds rate target
www.journals.uchicago.edu [PDF]
… I. INTRODUCTION The federal funds market, the market where financial institutions buy and sell central bank reserves on a daily basis, is arguably among the most important financial markets. However, academic research on …


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