Fed Funds Rate – What is it?
Fed Funds Rate is the interest rate that Banks and other depository institutions charge each other when they lend money among each other. The money is usually lent on an overnight basis. Federal law requires banks to keep a certain percentage of their customer’s money on “reserve” or right at hand, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to each other in order to maintain the proper reserve level.
Similar to the Federal Discount Rate, the Federal Funds Rate is used to control the supply of available money and hence, inflation and other interest rates. Raising this rate makes it more expensive to borrow and lowers the supply of available money, which increases short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.
Fed Funds Rate Summary:
Knowing the facts about the Fed Funds Rate and Discount Rate are important to being fiscally literate. These indexes are not available for lending on consumer loans such as ARM Loans, but will influence what the Prime Rate will be.