What are Fed Funds? - Definition and Current Statistics


The Fed Funds Rate is currently .25%. (as of December 15, 2011)

The Fed Funds Rate is the interest rate at which banks and other financial institutions lend money to each other, normally on an overnight basis. These funds are loaned to each other to help banks maintain their reserve requirements. The law requires that financial institutions keep a certain percentage of their depositors money on reserve in the form of cash in the vault or non interest bearing deposits. This reserve is referred to as fed funds. Since banks earn no interest on fed funds they attempt to stay as close to the reserve limit as possible without going under it.

The fed funds rate is set based upon the "fed funds target rate" which the federal reserve sets and tries to maintain via open market operations. In other words the fed funds rate is a market rate but is for all practical purposes set by the fed.

The fed funds rate was dropped by 1/2% in response to the credit crisis currently underway. It may go down another half percent but it is not expected to rise until 2010. However, given current economic uncertainties this can change.

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