see also; monetary policy ,which is different than fiscal policy
Federal Funds Rate
* rate between banks
* TARGETED by the FED, (not set by the FED)
The federal funds rate is the interest rate at which private depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight.
Here is how the system works:
* U.S. banks and thrift institutions are obligated by law to keep certain non-interest-bearing reserves with the Fed (or to keep an equal amount of vault cash, but this imposes risks and costs). The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank's demand accounts.
* Example: A particular U.S. depository institution, in the normal course of business, issues a loan, which dispenses money, reducing that bank's reserves. If its reserve level falls below the legally required level, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank will borrow the requisite funds from another bank that has a surplus in its Fed reserves. The interest rate that the first bank will pay to the second bank in return for borrowing the funds is negotiated between the two banks, and __the weighted average of this rate across all banks is the effective federal funds rate__.
The nominal rate is a target set by the governors of the Federal Reserve, which they enforce primarily by open market operations (usually, the buying and selling of money through repurchase agreements on bonds). When the media refer to the Federal Reserve "changing interest rates," this nominal rate is almost always meant. __The target is generally a range, as the Federal Reserve cannot set an exact value through open market operations__.
Read more:
monetary policy
Using the Fed Funds rate as an indicator of banking trust:
History , Data
News:
11/17/08: Actual rates close no where near federal funds TARGET rate....so, its more of a guide line for the deposit rate.
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