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Definition

The federal funds rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis.

Reserves are excess balances held at the Federal Reserve to maintain reserve requirements.

The fed funds rate is one of the most important interest rates in the U.S. economy since it affects monetary and financial conditions, which in turn have a bearing on critical aspects of the broad economy including employment, growth, and inflation.

The Federal Open Market Committee (FOMC) that meets eight times a year, sets the fed funds rate, and uses open market operations to influence the supply of money to meet the target rate.