Investing Dictionary #4: Federal Funds

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The Federal Funds or just Fed Funds in some cases are the excess reserves that the commercial banks and other financial institutions deposit at regional Federal Reserve Banks. According to Investopedia, 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 fund’s rate or overnight rate, as that is the period for which most such loans are made.

All You Need To Know About Federal Funds?

More from the Federal Funds, these fed funds are present to guide the country’s commercial banks to meet their daily reserve requirements which are equaled to the money banks are required to maintain at their regional Federal Reserve.

Among the regional banks, the Fed is the one that sets a set target rate or range for the fund’s rate; this means that the target set for each region can vary. One more thing about the set rate or target is, it is adjusted periodically based on economic and monetary conditions.

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Federal Funds and Interest Rates

Interest rates are the means the Federal Reserve uses in the open market operations to manage the supply of money in the economy. The Fed funds and the Interest Rates are highly related, they have a lot much in common when it comes to the broader market. The Federal Reserve task is to announce the effective fund’s rate at the end of each trading, which in return set the weight of the average rate for all transactions in the market day.

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