Federal funds
Encyclopedia : F : FE : FED : Federal funds
In the United States, federal funds are bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend reserves to institutions with reserve deficiencies. These loans are usually made for 1 day only, i.e. "overnight." The interest rate at which these deals are done is called the federal funds rate.
Federal funds transactions neither increase nor decrease total bank reserves. Instead, they redistribute reserves and enable otherwise idle funds to yield a return. Banks may borrow fed funds to avoid an overdraft (i.e. the balance going below zero) of their reserve account, or in order to meet the reserves required to back their deposits. Fed funds are good money, meaning that they are available for immediate spending, while checks and many other forms of money must be cleared by banks and typically take several days before becoming available for spending.
Participants in the federal funds market include commercial banks, savings and loan associations, government sponsored enterprises, branches of foreign banks in the United States, federal agencies, and securities firms. Many relatively small institutions that accumulate reserves in excess of their requirements lend reserves overnight to money center and large regional banks, as well as to foreign banks operating in the United States. Federal agencies also lend idle funds in the federal funds market.
See also
External links
- [Federal Funds - Fedpoints - Federal Reserve Bank of New York]
- [Instruments of the Money Market: Chapter 2 - Federal Funds]
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