Federal Funds Rate

In this paper we will discuss about the Federal Funds Rate. It controls the operations in the US economy. The Federal Open Market Committee sets the federal funds rate. In US, one bank can borrow money from other bank at particular rate of interest, which is equal to the Federal fund rate.
In the United States of America, the private depository institutions, mainly banks, lend money at a particular rate of interest to other depository institutions. This rate of interest is known as Federal Funds Rate, for the trading usually done at the Federal Reserve, who controls the money supply in the economy of US. Only the Chairman of the Federal Reserve can change the rate.

The federal funds rate is the target interest rate, which is set by the Federal Open Market Committee to implement the money policies. The funds rate is determined through several open market operations at the Federal Reserve Bank’s Domestic Trading Desk.
The Federal Reserve Bank, situated in New York, deals mainly with the domestic securities.The banks can collect capital within a short span of time through interbank borrowing.
Suppose, a bank, private or public decides to provide monetary support to a major industrial project but don’t have the capital at that moment. Then it can easily borrow money from other bank(s) at a rate higher than or equal fed fund rate.

Therefore, if the fed fund rate is increased then, those kind of inter bank trading will get harder. As a result, procurement of cash will suffer. On the contrary, if the rates are decreased, then the banks will be able to borrow and invest freely. Therefore, it is clearly understood that, the federal fund rate regulates the operations in the US economy.

Federal Fund Rates in the Recent Times:
On 18th March 2008, the federal fund rate has been decreased by 0.75% although previously it was 3.0%.
In January 2008, a 75-basis point cut had been made by the Federal Open Market Committee.

 

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Last Updated on : 30th July 2013