What exactly is the federal funds rate?

Answer 1

It is the rate for overnight loans between banks. The loans are used by banks to settle accounts at the end of each business day. The Fed intervenes in the market both to smooth day to day rates and to conduct monetary policy by manipulation the interest rate.

Answer 2

The Federal Reserve System has three sets of tools to manage the stability of prices in the United States, the "discount rate," the "federal funds rate," and the required reserves.

The discount rate is the rate the Federal Reserve System will loan to member banks. It is considered bad to go to the discount window and is usually considered an emergency loan.

The Federal Funds rate is the rate the Federal Reserve System is targeting for banks to loan to one another for one night. Banks loan their excess reserves overnight with collateral. The rate is maintained by buying and selling US Treasury obligations on the open market controlling the amount of money in the system. They do not directly control the rate, they control the supply and the rate is based upon the intersection of supply and demand.

The required reserves are the amount of money banks are required to set aside to meet future obligations. Changes to this rate can have shocking consequences to the economy. Changes to reserve requirements are consequently rare.

Answer 3

Banks borrow money from the government. The government lends this money at a standard rate. The fed regulates this rate. When you borrow money from a bank it is originally the same money they borrowed from the bank. The government lends at 7.2% to the bank, and the bank lends to you at 8.2%. this allows the bank to make 1.0% with the governments money. The bank can bump there end up as much as they want to make a proffit.

Answer 4

It is the rate at which one bank can borrow money from another.