Federal funds rate
Definition
The federal funds rate refers to the interest rate at which depository institutions (such as banks) lend and borrow money from each other overnight to meet reserve requirements. It is set by the Federal Reserve and serves as a benchmark for other interest rates in the economy.
Analogy
Think of the federal funds rate as the "interest rate playground" where banks go to borrow money from each other. Just like how kids might borrow toys from their friends for a short period, banks borrow money overnight at this rate.
Related terms
Monetary policy: Refers to actions taken by the central bank (Federal Reserve) to manage and control the money supply and interest rates in order to influence economic growth and stability.
Open market operations: The buying or selling of government securities (such as Treasury bonds) by the central bank in order to control the money supply and influence interest rates.
Discount rate: The interest rate that commercial banks can borrow directly from the Federal Reserve when they need additional funds beyond what is available in interbank lending markets.
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