Federal funds


Federal funds

:"This article is about funds maintained by the U.S. Federal Reserve. For the funds provided by the U.S. government in terms of aid and assistance, see Federal aid."

In the United States, federal funds are overnight borrowings by banks to maintain their 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 these 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. Federal funds are definitive 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.

ee also

*Repurchase agreement
*Federal aid, which is commonly referred to as federal funds.
*compare and contrast with Discount Rate

External links

* [http://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html Federal Funds - Fedpoints - Federal Reserve Bank of New York]
* [http://www.richmondfed.org/publications/economic_research/instruments_of_the_money_market/ch02.cfm Instruments of the Money Market: Chapter 2 - Federal Funds]


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Look at other dictionaries:

  • federal funds — Member bank deposits at the Federal Reserve; these funds are loaned by member banks to other member banks. Chicago Board of Trade glossary Short term investments/borrowings between banks, usually called fed funds. The investing/lending bank… …   Financial and business terms

  • Federal funds — Non interest bearing deposits held in reserve for depository institutions at their district Federal Reserve Bank. Also, excess reserves lent by banks to each other. The New York Times Financial Glossary * * * Federal funds Federal funds ➔ fund1 * …   Financial and business terms

  • Federal Funds — Funds deposited to regional Federal Reserve Banks by commercial banks, including funds in excess of reserve requirements. These non interest bearing deposits are lent out at the Fed funds rate to other banks unable to meet overnight reserve… …   Investment dictionary

  • federal funds — noun plural Date: 1950 reserve funds lent overnight by one Federal Reserve bank to another …   New Collegiate Dictionary

  • federal funds — noun plural : reserve funds lent overnight by one member bank of the Federal Reserve to another …   Useful english dictionary

  • Federal funds —   An ISO term. United States dollars on deposit at a Federal Reserve Bank in the United States.   Reserves traded between commercial banks in the USA for overnight use. The minimum amount is US$1,000,000 …   International financial encyclopaedia

  • federal funds —  Deposits made by commercial banks in their Federal Reserve Banks to meet reserve requirements …   American business jargon

  • Federal Funds — /ˌfed(ə)rəl fʌndz/ plural noun deposits by commercial banks with the Federal Reserve Banks, which can be used for short term loans to other banks …   Dictionary of banking and finance

  • federal funds effective rate — USA federal funds effective rate, Also known as federal funds rate. A floating interest rate reference rate used by a lender under a loan agreement. In general terms, it is the rate per annum equal to the rate charged on federal funds… …   Law dictionary

  • federal funds rate — USA federal funds effective rate, Also known as federal funds rate. A floating interest rate reference rate used by a lender under a loan agreement. In general terms, it is the rate per annum equal to the rate charged on federal funds… …   Law dictionary


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